A zero bound on nominal interest rates exists because
A) inflation can never be greater than nominal interest rates.
B) bank regulations do not allow a zero rate of interest.
C) the FOMC would not buy bonds at a rate fast enough to drive interest rates to zero.
D) people would prefer to hold cash at a zero rate of return.
E) both a and c.

Question

Quizplus · Accepted Answer

People would prefer to hold cash rather than depositing it in banks or buying bonds if the nominal interest rate were to fall to zero or become negative, as holding cash would avoid the potential losses associated with negative interest rates or the lack of earnings from a zero interest rate. This preference establishes a practical lower bound on how low nominal interest rates can go.

A Zero Bound on Nominal Interest Rates Exists Because