ExpertMedium2 marksMultiple Choice
ACCA · Question 3 · Financial Management Environment
Section A
VoltGrid PLC, a public utility company, is evaluating the macroeconomic environment. The government has recently announced an expansionary monetary policy, including a significant reduction in the base interest rate.
What is the most likely immediate impact of this policy on VoltGrid PLC?
Section A
VoltGrid PLC, a public utility company, is evaluating the macroeconomic environment. The government has recently announced an expansionary monetary policy, including a significant reduction in the base interest rate.
What is the most likely immediate impact of this policy on VoltGrid PLC?
Answer options:
A.
An increase in the cost of capital due to higher inflation expectations.
B.
A decrease in the cost of borrowing for new infrastructure projects.
C.
A mandatory increase in the corporate tax rate.
D.
An immediate appreciation of the domestic currency.
How to approach this question
Differentiate between monetary and fiscal policy, and understand the direct mechanical effect of lowering base interest rates on corporate borrowing.
Full Answer
B.A decrease in the cost of borrowing for new infrastructure projects.✓ Correct
Expansionary monetary policy involves lowering interest rates to stimulate the economy. For a highly capitalized utility company like VoltGrid, the most direct and immediate impact is a reduction in the interest rates charged on new debt, lowering their cost of borrowing.
Common mistakes
Confusing monetary policy (interest rates/money supply) with fiscal policy (taxation/government spending).
Practice the full ACCA FM — Financial Management Practice Exam 1
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