The financial friction:
A) is equal to zero when the economy is in its long-run equilibrium.
B) is negative in Japan.
C) lowers the borrowing rate below the nominal federal funds rate.
D) is equal to the rate of inflation.
E) is lower in uncertain economic situations.

Question

Quizplus · Accepted Answer

The financial friction refers to any imperfections or inefficiencies in financial markets that can result in a divergence between the borrowing rate and the nominal federal funds rate. In the long-run equilibrium, these imperfections are corrected, so the financial friction is equal to zero.

The Financial Friction