Suppose That Monetary Policy Becomes More Expansionary, and as a Result

question 272

Multiple Choice

Suppose that monetary policy becomes more expansionary, and as a result, the future rate of inflation is higher. Will this be good for the stock market?

• A) Yes; the inflation will lead to higher wages, and this will be good for both the economy and the stock market.
• B) No; the inflation will lead to higher nominal interest rates, and this will reduce the present value of the future net earnings derived from stocks.
• C) Yes; the inflation rate will reduce the long-run rate of unemployment, and this will be good for the stock market.
• D) No; the expansionary monetary policy will lead to lower real interest rates, and this is generally bad for both the economy and the stock market.

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Definitions:

High-Low Method

An accounting method used to estimate the fixed and variable components of a cost based on the highest and lowest levels of activity.

Variable Maintenance Cost

Costs that change in proportion to the operational activity of a company, such as repairs and maintenance expenses that vary with usage.

Mixed Cost

A cost containing both variable and fixed cost elements, changing in total with activity level but not proportionately.

Direct Labor Hours

The total time workers spend producing a product or providing a service, directly tied to the production process.