Because of the presence of asymmetric information problems in credit markets,an expansionary monetary policy causes a ________ in net worth,which ________ the adverse selection problem,thereby ________ increased lending to finance investment spending.
A)decline;increases;encouraging
B)rise;increases;discouraging
C)rise;reduces;encouraging
D)decline;reduces;discouraging

Question

Quizplus · Accepted Answer

An expansionary monetary policy increases net worth because it lowers interest rates, which increases the value of assets and reduces the burden of debt. This reduction in net worth reduces the adverse selection problem by decreasing the likelihood that borrowers with poorer credit will be incentivized to borrow, as lower interest rates improve the creditworthiness of potential borrowers. As the adverse selection problem is reduced, lenders are more likely to make loans to finance investment spending, thereby encouraging increased lending.

Because of the Presence of Asymmetric Information Problems in Credit