An increase in financial frictions results in ________.
A)an increase in the federal funds rate
B)a reduced supply of credit to households and businesses
C)a decrease in short-run aggregate supply
D)an upward shift of the monetary policy curve

Question

Quizplus · Accepted Answer

Financial frictions refer to conditions that make it difficult for households and businesses to obtain credit. As such, an increase in financial frictions would result in a reduced supply of credit to households and businesses, making it more difficult for them to finance their activities. This would lead to a decrease in economic activity and output, which could ultimately result in a decrease in short-run aggregate supply. However, an increase in financial frictions is unlikely to result in an increase in the federal funds rate or an upward shift of the monetary policy curve.

An Increase in Financial Frictions Results in ________