Which of the following monetary policy tools is more effective when the economy faces the interest rate zero-lower-bound problem?
A) Open market operation
B) Discount policy
C) Required reserve ratio
D) The Fed's liquidity provision

Question

Quizplus · Accepted Answer

When the economy faces the zero-lower-bound problem, traditional monetary policy tools such as open market operations or discount policy become ineffective as interest rates cannot be lowered further. In such a scenario, the Fed's liquidity provision becomes the most effective tool as it involves providing direct funding to banks and financial institutions to ensure that they have adequate liquidity and can continue lending to businesses and individuals. This helps to prevent a credit crunch and stimulate economic activity even when interest rates are near zero. Therefore, option D, The Fed's liquidity provision, is the best choice.

Which of the Following Monetary Policy Tools Is More Effective