If interest rates are at the zero lower bound:
A) the effectiveness of monetary policy increases.
B) monetary policy is ineffective.
C) automatic stabilizers don't work.
D) monetary policy is more effective than fiscal policy.

Question

Quizplus · Accepted Answer

When interest rates are at the zero lower bound, monetary policy becomes ineffective because there is limited room for further reduction in interest rates to stimulate economic activity. This is because the cost of borrowing has reached its minimum, so reducing rates further will not have much impact on consumer and business behavior. As a result, the central bank has to resort to unconventional measures such as quantitative easing to stimulate the economy.

If Interest Rates Are at the Zero Lower Bound