Financial innovations may be expected to cause a decline in ________.

Question

Quizplus · Accepted Answer

Financial innovations can reduce financial frictions by making it easier and cheaper for individuals and businesses to access credit. This can lead to a decline in the credit spread, which is the difference between the interest rate on loans and the risk-free rate. Financial innovations may also increase competition among lenders, which can lead to lower interest rates on investments. Therefore, all of the choices - financial frictions, the credit spread, and the real interest rate on investments - may decline with financial innovations.

Financial Innovations May Be Expected to Cause a Decline in ________