Monetary policy may be ineffective in a banking crisis because interest rates are so low that consumers and businesses borrow and spend too much.

Question

Quizplus · Accepted Answer

Monetary policy is typically used by central banks to influence borrowing and spending in the economy through manipulation of interest rates. In a banking crisis, however, interest rates may already be so low that further reductions have little effect on the behavior of consumers and businesses. In this case, other fiscal policies such as government spending programs or direct assistance to troubled banks may be more effective in addressing the crisis.

Monetary Policy May Be Ineffective in a Banking Crisis Because