Why wouldn't the Fed want to drive nominal interest rates below zero in response to a ﬁnancial crisis and recession?
A) Negative nominal interest rates would stimulate borrowing and spending, increasing aggregate demand.
B) Negative interest rates would stimulate so much lending that it would unfairly increase banks' power in the market.
C) Negative nominal interest rates would cause people to withdraw their money from banks, reducing what banks could lend out to consumers and businesses.
D) The Fed would lose the ability to raise the interest rates above zero in the future.

Question

Quizplus · Accepted Answer

Negative nominal interest rates would likely cause people to withdraw their money from banks, reducing what banks could lend out to consumers and businesses. This would hinder the Fed's attempts to stimulate borrowing and spending, ultimately damaging the economy. Additionally, negative interest rates could cause problems for the financial sector, including destabilizing banks' balance sheets and impacting the profitability of certain financial institutions.

Why Wouldn't the Fed Want to Drive Nominal Interest Rates