The effect of the shadow bank lending channel is to make expansionary monetary policy ________ when the expansionary policy takes the form of very low interest rates.
A) somewhat more effective
B) somewhat less effective
C) totally effective
D) completely ineffective

Question

Quizplus · Accepted Answer

The shadow bank lending channel can reduce the effectiveness of expansionary monetary policy when interest rates are already very low. This is because the low interest rates make traditional banks less profitable, leading them to reduce lending. As a result, borrowers may turn to shadow banks, which are less regulated and may charge higher interest rates, offsetting the impact of the expansionary monetary policy. Therefore, the effect of the shadow bank lending channel is to make expansionary monetary policy somewhat less effective when interest rates are already very low.

The Effect of the Shadow Bank Lending Channel Is to Make