Which of the following is true of an economy that has hit the zero lower bound?
A)The money supply in the economy increases rapidly as additions are made to the monetary base.
B)Any increase increase in its monetary base is exactly offset by a decline in its money multipliers.
C)Any short-term bond would provide a return that is much lower than the return from holding cash.
D)The economy's interest rates decline when there is an increase in the monetary base.

Question

Quizplus · Accepted Answer

When an economy hits the zero lower bound, its interest rate reaches its lower limit and cannot decrease further. This means that any increase in the monetary base will not lead to a corresponding increase in the money supply, as banks' lending activity is constrained. As a result, the money multiplier (which measures the amount of money that can be created from each unit of the monetary base) decreases, and any increase in the monetary base is exactly offset by a decline in the money multipliers. Choices A, C, and D are incorrect because they do not reflect the characteristics of an economy at the zero lower bound.

Which of the Following Is True of an Economy That