Which of the following would most likely result from the Fed imposing negative nominal interest rates in response to a ﬁnancial crisis and recession?
A) The negative interest rates would stimulate massive borrowing and spending, triggering rapid inﬂation in the short term.
B) It would signal trouble to ﬁnancial markets, causing people to deposit more money in banks to enhance feelings of ﬁnancial security.
C) Banks would freeze customer accounts so that they couldn't withdraw money, inciting ﬁnancial panic.
D) Customers would withdraw deposits, banks would have less money to lend, and the money supply and aggregate demand would both fall.

Question

Quizplus · Accepted Answer

If the Fed were to impose negative nominal interest rates, it would essentially mean that banks would have to pay to hold onto deposits. This would discourage people from keeping their money in banks, leading to a decrease in deposits. As a result, banks would have less money to lend, causing the money supply and aggregate demand to fall. This would likely lead to a contraction in the economy rather than stimulation of borrowing and spending (option A). The negative interest rates may also signal trouble to financial markets (option B), but this is less certain than the contraction of the economy. Finally, banks freezing customer accounts (option C) is not a likely outcome of negative interest rates.

Which of the Following Would Most Likely Result from the Fed