The real interest rate for investments reflects not only the short-term real interest rate set by the central bank but also the financial frictions. When the policy rate has hit the floor of zero, to stimulate the economy at given inflation rates, policymakers can

a. lower both the short-term real interest rate and the financial frictions.

b. lower the financial frictions.

c. lower the policy rate.

d. lower the short-term real interest rate.

Question

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10 April, 18:24

The real interest rate for investments reflects not only the short-term real interest rate set by the central bank but also the financial frictions. When the policy rate has hit the floor of zero, to stimulate the economy at given inflation rates, policymakers can

a. lower both the short-term real interest rate and the financial frictions.

b. lower the financial frictions.

c. lower the policy rate.

d. lower the short-term real interest rate.

+5

Answers (1)

Know the Answer?

Leilani Freeman · Answer 1

The correct answer is B

Explanation:

Financial frictions is the stickiness involve in making the transactions, aggregate process comprise of money, time, tax effects and time for gathering the information and make a transaction like borrowing money or purchase a stock.

So, if the policy rate is zero and stimulate the economy at the provided inflation rates, policymakers should lower or decrease the financial friction.