In the bank lending channel, an important reason for output increases in the short run after an expansionary monetary policy is that
A)the funds directly available for households and firms to spend will increase.
B)prices will increase, making increased production more profitable for firms.
C)the increase in government spending from an expansionary monetary policy increases output through the multiplier effect.
D)the ability of banks to make loans will increase.

Question

Quizplus · Accepted Answer

The bank lending channel suggests that expansionary monetary policy leads to an increase in the ability of banks to make loans, which in turn increases the funds available for households and firms to spend, leading to an increase in output in the short run. Therefore, (A) and (C) are incorrect, and (B) is only applicable in the long run through the price adjustment mechanism, not in the short run.

In the Bank Lending Channel, an Important Reason for Output