An increase in financial frictions results in ________.
A)an increase in output and inflation
B)a rise in the interest rate set by monetary policy
C)a decline in the real interest rates faced by households and firms
D)a decline in the interest rate set by monetary policy

Question

Quizplus · Accepted Answer

An increase in financial frictions typically leads to tighter credit conditions, which can slow down economic activity. In response, central banks may lower the interest rate to stimulate the economy.

An Increase in Financial Frictions Results in ________