When economists state that there is a zero bound on nominal interest rates, they mean that the:
A) real interest rate cannot go below zero.
B) nominal interest rate cannot go below zero.
C) real interest rate can very well be negative.
D) nominal interest rate can always go below zero.

Question

Quizplus · Accepted Answer

The zero bound on nominal interest rates means that the nominal interest rate cannot go below zero. This is because money is a store of value, and negative nominal interest rates would mean that borrowers would be paid to borrow money and lenders would have to pay to lend money, effectively reducing the value of money over time. While the real interest rate can be negative, the nominal interest rate cannot.

When Economists State That There Is a Zero Bound on Nominal