Complete Question:
The financial friction:
O is equal to zero when the economy is in its long-run equilibrium.
O is negative in Japan.
O lowers the borrowing rate below the nominal federal funds rate.
O is equal to the rate of inflation.
O is lower in uncertain economic situations.
Answer:
The financial friction:
O is equal to zero when the economy is in its long-run equilibrium.
Explanation:
Financial friction is the difficulty that one encounters in financial transactions. It includes the total time, effort, money, and tax effects of the process of gathering information and concluding a transaction such as the buying of a stock or the borrowing of money.
When an economy is in the long-run equilibrium it naturally implies that aggregate demand equals aggregate supply. And at this equilibrium, the long-run marginal cost curve is equal to the long-run average cost curve. There is, therefore, no profit or loss. Financial friction representing the cost of making a transaction equals zero because the suppliers of economic activities will not make any profit or loss.
