Recall the Application about Fed Chairman Ben Bernanke's views on how to fight a liquidity trap to answer the following question(s).
-Recall the Application. Before becoming Fed Chairman, Ben Bernanke argued that the Bank of Japan should have committed to increasing inflation as a response to the Japanese liquidity trap. Doing this would allow for
A) real interest rates to be negative.
B) real interest rates to increase even if nominal rates decreased.
C) nominal interest rates to be negative.
D) both nominal and real interest rates to decrease and become negative.

Question

Quizplus · Accepted Answer

Increasing inflation would lower real interest rates, potentially making them negative, by reducing the purchasing power of money. This is because the real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. If inflation increases while nominal rates are low or fixed, real interest rates can become negative, encouraging spending and investment.

Recall the Application About Fed Chairman Ben Bernanke's Views on How