Which of the following is not an effect of a stimulative monetary policy?
A) The risk-free rate and the credit risk premium increase.
B) A firm's cost of debt decreases.
C) A firm's cost of equity decreases.
D) Depository institutions experience an increase in their supply of funds.

Question

Quizplus · Accepted Answer

A stimulative monetary policy aims to reduce interest rates and increase the supply of money in the economy. Choices B, C, and D all describe effects that would result from such a policy. However, choice A is not an effect of a stimulative monetary policy - if the risk-free rate and credit risk premium were to increase, this would suggest that investors perceive higher risk in the market, which would be counter to the goals of a stimulative monetary policy.

Which of the Following Is Not an Effect of a Stimulative