Due to asymmetric information in credit markets,monetary policy may affect economic activity through the balance sheet channel,where an increase in the money supply
A)raises stock prices,lowering the cost of new capital relative to firms' market value,thus increasing investment spending.
B)raises firms' net worth,decreasing adverse selection and moral hazard problems,thus increasing banks' willingness to lend to finance investment spending.
C)raises the level of bank reserves,deposits,and bank loans,thereby raising spending by those individuals who do not have access to credit markets.
D)lowers the value of the dollar,increasing net exports and aggregate demand.

Question

Quizplus · Accepted Answer

The balance sheet channel of monetary policy operates through the effects on firms' net worth, which can decrease adverse selection and moral hazard problems in credit markets. As a result, banks may be more willing to lend, increasing financing for investment spending. Option A is more related to the wealth channel of monetary policy, while Option C is more related to the traditional interest rate channel. Option D is more related to the exchange rate channel.

Due to Asymmetric Information in Credit Markets,monetary Policy May Affect