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a) Suppose that the government takes action to improve the solvency of the financial system
a) Suppose that the government takes action to improve the solvency of the financial system. If the government's action is successful, and banks become more willing to lend, both to one another and to nonfinancial firms, what is likely to happen to the premium? Can we consider financial policy as a kind of macroeconomic policy?
Expert Solution
As mentioned in the question if government tries to solve the solvency in economy and banks start lending more to each other and to non financial intermediaries than the money supply in economy will increase with increase in velocity of money , this will create more demand in economy which might have an inflationary impact , investments in economy will also increase and this increase will lead to increase in interest rate which is refereed to as premium i.e, the interest rate paid on investments to the banks apart from the principal amount .
This policy is a macroeconomic policy because it is effecting the banking system which is considered for whole economy which is macro in nature......
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