The nominal interest rate in the economy cannot go below zero, so at some point increases in reserves will stop lowering the interest rate.

Question

Quizplus · Accepted Answer

This is known as the "zero lower bound" or "effective lower bound" of interest rates. Once interest rates reach zero, further increases in reserves will not be able to further stimulate the economy by lowering interest rates. This is because individuals and businesses would simply hold onto their money instead of paying interest to banks for holding it.

The Nominal Interest Rate in the Economy Cannot Go Below