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ACCA Strategic Professional · Advanced Financial Management · The role and responsibility of senior financial executive/advisor

Country X's central bank engages in quantitative easing. Which combination of effects on a multinational with significant imports into Country X is most consistent with standard theory?

Quantitative easing lowers long-term yields by bond purchases and expands the money supply, which tends to depreciate the currency. A weaker currency makes imports more expensive in local-currency terms, so importers face higher costs.

  1. ALower long-term yields and likely currency depreciation, raising the local-currency cost of importsCorrect
  2. BHigher long-term yields and currency appreciation, lowering import costs
  3. CNo effect on yields or the currency
  4. DImmediate fall in domestic inflation expectations to zero

Explanation

Quantitative easing buys bonds, increasing their prices and lowering long-term yields, and expanding money supply, which tends to weaken the currency. A weaker currency raises the local-currency price of imports. Option 2 is the opposite effect.

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