In the balance sheet channel, an expansionary monetary policy
A)will lead to a greater increase in output than in the money channel.
B)will not affect the real interest rate.
C)will result in increased spending only for firms and households dependent for credit on bank loans.
D)will lead to a larger budget deficit than in the money channel.

Question

Quizplus · Accepted Answer

In the balance sheet channel, an expansionary monetary policy works by increasing the value of assets held by financial intermediaries, thereby improving their balance sheets and increasing their willingness to lend. This can lead to a greater increase in output because it also encourages borrowing and spending by firms and households that are not dependent on bank loans. In contrast, in the money channel, the focus is on changing interest rates and the quantity of money, which may have a more limited impact on the overall level of economic activity.

In the Balance Sheet Channel, an Expansionary Monetary Policy