The credit channel of monetary policy transmission works in two ways.On the supply side of the credit market,tight monetary policy leads to ________ lending by banks; on the demand side of the credit market,tight monetary policy leads to ________ in the credit-worthiness of borrowers.

Question

Quizplus · Accepted Answer

Tight monetary policy reduces the amount of money available in the economy, which makes banks less willing to lend, leading to reduced lending activity (supply side). On the demand side, when interest rates rise due to tight monetary policy, borrowers (especially those with lower creditworthiness) find it more expensive to borrow money, which reduces their demand for credit. Therefore, tight monetary policy leads to a decrease in the creditworthiness of borrowers (demand side).

The Credit Channel of Monetary Policy Transmission Works in Two