In the absence of financial frictions,________.
A)interest rates for different borrowers move closely together
B)all loans in the economy are transacted at a common interest rate
C)the level of output is not affected by changes in the real interest rate
D)an increase in inflation leads to a decrease in the real interest rate

Question

Quizplus · Accepted Answer

In the absence of financial frictions, interest rates for different borrowers move closely together because lenders can easily identify and allocate funds to borrowers with the lowest risk and highest return. Financial frictions such as information asymmetry or transaction costs can create barriers for some borrowers to access credit, leading to different interest rates for different borrowers.

In the Absence of Financial Frictions,________