The financial friction raises the borrowing rate above the nominal federal funds rate.

Question

Quizplus · Accepted Answer

Financial friction consists of various costs associated with borrowing funds, including administrative costs, credit risk, and market liquidity. Due to these costs, the borrowing rate is generally higher than the nominal federal funds rate, which is the interest rate at which depository institutions lend each other overnight funds. Therefore, the statement is true.

The Financial Friction Raises the Borrowing Rate Above the Nominal