A tight monetary policy should generate a higher required return for common stock.

Question

Quizplus · Accepted Answer

When a central bank implements a tight monetary policy, it raises interest rates and restricts the money supply. This makes it more expensive for companies to borrow money, and can lead to lower economic growth and profitability. Investors may perceive the economic environment as riskier and demand a higher return for holding common stock, resulting in higher required returns.

A Tight Monetary Policy Should Generate a Higher Required Return