When interest rates are already at zero during a recession, a central bank would:
A) have little leeway to further reduce interest rates in order to stimulate the economy.
B) not be able to engage in any type of policy to stimulate the economy.
C) need to spend more money in order to stimulate the economy.
D) likely work with Congress to stimulate the economy.

Question

Quizplus · Accepted Answer

When interest rates are already at zero during a recession, the central bank's options for further reducing interest rates to stimulate the economy are limited. This is because at the zero lower bound, nominal interest rates cannot be reduced further, making monetary policy ineffective. Therefore, the central bank would need to explore other options, such as unconventional monetary policy or working with Congress on fiscal stimulus.

When Interest Rates Are Already at Zero During a Recession