Author Question: How does an expansionary monetary policy affect aggregate expenditures according to the bank lending ... (Read 60 times)

elizabeth18 · **on:** Jun 30, 2018

How does an expansionary monetary policy affect aggregate expenditures according to the bank lending channel?

What will be an ideal response?

Question 2

The idea that government budget deficits do not matter under certain circumstances is

A) called the Friedman-Lucas theory.
B) called the Ricardian equivalence theorem.
C) attributed to Edward Prescott and Finn Kydland.
D) preposterous.

bitingbit · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

In the bank lending channel, an expansionary monetary policy causes aggregate expenditure to increase for two reasons: (1 ) the increase in households' and firms' spending from the drop in interest rates, and (2 ) the increased availability of bank loans. In other words, if banks expand deposits by lowering interest rates on loans, the amounts that bank-dependent borrowers can borrow and spend increases at any real interest rate.

Answer to Question 2

B