When the credit spread rises,an effective policy response might be to ________.
A)lower the real interest rate on safe assets
B)prevent the real federal funds rate from falling below zero
C)pursue nonconventional monetary policies to restore the functioning of financial markets
D)announce swift and stern action against those responsible for the financial disruption

Question

Quizplus · Accepted Answer

When the credit spread rises, it indicates that there is a higher risk premium for lending and borrowing. This, in turn, can lead to a disruption in financial markets and reduced economic activity. Pursuing nonconventional monetary policies, such as quantitative easing, can help to restore the functioning of financial markets and reduce the risk premium. Lowering the real interest rate on safe assets (A) or preventing the real federal funds rate from falling below zero (B) are other monetary policy tools that may be effective in certain circumstances, but they may not directly address the specific issue of a rising credit spread. Announcing swift and stern action against those responsible for the financial disruption (D) is not a monetary policy response and may not necessarily address the underlying factors contributing to the credit spread increase.

When the Credit Spread Rises,an Effective Policy Response Might Be