If a contractionary monetary policy lowers the price level by more than expected,it raises the real value of consumer debt. This reduces consumer expenditure through
A)the bank lending channel.
B)Tobin's q.
C)the traditional interest-rate channel.
D)the household liquidity effect.

Question

Quizplus · Accepted Answer

The household liquidity effect suggests that a contractionary monetary policy reduces the availability of liquid funds in the economy, leading to a decrease in consumer expenditure. As the real value of consumer debt increases due to a larger than expected decrease in the price level, consumers will have less disposable income, contributing to reduced expenditure. The bank lending channel, Tobin's q, and the traditional interest-rate channel are not directly related to the impact of changes in the real value of consumer debt on consumer expenditure.

If a Contractionary Monetary Policy Lowers the Price Level by More