An expansionary monetary policy will shift the Security Market Line down.

Question

Quizplus · Accepted Answer

An expansionary monetary policy involves the central bank increasing the money supply, which leads to lower interest rates. Lower interest rates tend to increase the demand for securities, which in turn drives up their prices and lowers their expected returns. This causes the Security Market Line (SML) to shift downward, as a lower expected return is now required for a given level of risk.

An Expansionary Monetary Policy Will Shift the Security Market Line