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23 September, 19:10

An expansionary monetary policy may cause asset prices to rise, thereby reducing the likelihood of financial distress and causing consumer durable and housing expenditures to rise. This monetary transmission mechanism is referred to as

a) the household liquidity effect

b) the wealth effect

c) Tobin's q theory

d) the cash flow effect

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Answers (1)
  1. 23 September, 20:41
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    The answer is a) the household liquidity effect.

    Explanation:

    A central bank will increase the money supply in an economy when it decides to pursue an expansionary monetary policy.

    With more money supply, interest rate will go down.

    Subsequently, asset prices such as bond prices go up. Besides, household's interest expenses will be lower allowing them to have more fund for spending/investment in asset such as housing. Moreover, lower interest rate encourages household to borrow more, and discourages them to save money. Higher demand for products and services in the economy will also bring asset prices to the higher level.

    Such transmission mechanism from an expansionary monetary policy is referred to as the household liquidity effect.
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