In the money channel, the main way in which an expansionary monetary policy increases output in the short run is by
A)lowering the real interest rate, which increases spending by households and firms.
B)directly increasing the funds available for households and firms to spend.
C)increasing the ability of banks to make loans.
D)increasing the funds available for government spending.

Question

Quizplus · Accepted Answer

An expansionary monetary policy typically involves the central bank increasing the money supply and reducing interest rates, which in turn lowers the real interest rate. This encourages households and firms to spend more on investment and consumption, leading to an increase in output in the short run. Choices B, C, and D are not necessarily consistent with the standard transmission mechanism of monetary policy, which primarily works through changes in interest rates.

In the Money Channel, the Main Way in Which an Expansionary