Due to Asymmetric Information in Credit Markets,monetary Policy May Affect

question 21

Multiple Choice

Due to asymmetric information in credit markets,monetary policy may affect economic activity through the balance sheet channel,where an increase in the money supply

• A)raises stock prices,lowering the cost of new capital relative to firms' market value,thus increasing investment spending.
• B)raises firms' net worth,decreasing adverse selection and moral hazard problems,thus increasing banks' willingness to lend to finance investment spending.
• C)raises the level of bank reserves,deposits,and bank loans,thereby raising spending by those individuals who do not have access to credit markets.
• D)lowers the value of the dollar,increasing net exports and aggregate demand.

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Definitions:

Income Elasticity of Demand

A measure of how the quantity demanded of a good or service changes in response to a change in consumers' income.

Price Elasticity of Supply

An economic measure of how much the quantity supplied of a good changes in response to a change in price.

Equilibrium Values

The set of prices or quantities in a market or economic model where supply equals demand, and no incentive exists for change.

Cyclical Industries

Industries in which sales tend to magnify cyclical changes in gross domestic product and national income.