Which concept explains why financial markets can perform well even when the overall economy is declining?

• A. Market Equilibrium
• B. Law of Demand
• C. Scarcity Principle
• D. Decoupling

Answer: (D)

Verified step by step guidance

1. Understand the concept of 'Decoupling' in economics, which refers to the situation where two economic variables or sectors move independently of each other, meaning that financial markets can perform well even if the overall economy is declining.
2. Recognize that 'Market Equilibrium' describes a state where supply equals demand, but it does not explain why financial markets might behave differently from the overall economy.
3. Recall that the 'Law of Demand' explains the inverse relationship between price and quantity demanded, which is unrelated to the independence of financial markets from economic downturns.
4. Note that the 'Scarcity Principle' deals with limited resources and choices, which also does not directly explain the performance of financial markets during economic declines.
5. Conclude that 'Decoupling' is the correct concept because it captures the idea that financial markets can be influenced by factors other than the general economic conditions, allowing them to perform well even when the economy is in decline.