The real interest rate for investments reflects not only the short-term real interest rate set by the central bank,but also the financial frictions. When the policy rate has hit the floor of zero,to stimulate the economy at given inflation rates,policymakers can
A)lower the financial frictions.
B)lower the short-term real interest rate.
C)lower both the short-term real interest rate and the financial frictions.
D)lower the policy rate.

Question

Quizplus · Accepted Answer

When the policy rate has hit the floor of zero, policymakers cannot lower the short-term nominal interest rate further. However, they can still stimulate the economy by lowering financial frictions, which can improve the effectiveness of monetary policy by enhancing credit flow and reducing borrowing costs, indirectly influencing the real interest rate.

The Real Interest Rate for Investments Reflects Not Only the Short-Term