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Question (Relevant to the Series 62, and Series 65):
When a central bank pursues a policy of monetary easing all of the following may be expected except:
Answers:
A. Stocks rise
B. Exports rise
C. Imports fall
D. Foreign currency values fall
Correct Answer: D. Foreign currency values fall
Rationale: When a central bank eases monetary policy, it reduces interest rates. Lower rates mean investors will seek higher returns in other countries, reducing demand for the domestic currency and increasing the value of other currencies. A weaker domestic currency will, on a currency-adjusted basis, lower the price of exports. Likewise, on a currency-adjusted basis, imports will be more expensive since the domestic currency will have depreciated. Stock prices are generally boosted by monetary easing as fixed income investments become less attractive with lower interest rates. Also, easier credit is seen as a long-term positive to economic growth which can give further encouragement to equity investing.
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