If the economy is below potential and interest rates are at the zero bound, how can the Federal Reserve still push long-term interest rates down?
A)through the Open Market Trading Desk at the New York Federal Reserve district bank
B)by using open market operations
C)through forward guidance and quantitative easing
D)by relying on fiscal policy

Question

Quizplus · Accepted Answer

The Federal Reserve can push long-term interest rates down through forward guidance and quantitative easing. This involves signaling to the market that interest rates will remain low for an extended period of time and buying long-term bonds to increase demand and lower their yields, respectively. These actions can help to stimulate borrowing and investment, and boost overall economic activity. Open market operations and the Open Market Trading Desk also play a role in implementing these policies, but they are not the main drivers of reducing long-term interest rates in this scenario. Fiscal policy, which involves government spending and taxation decisions, is not within the control of the Federal Reserve and cannot directly influence interest rates.

If the Economy Is Below Potential and Interest Rates Are