When the interest rate is so low that the opportunity cost of holding money is zero, then economists say we have reached:
A) the era of total liquidity.
B) the zero lower bound situation, which means the U.S. economy may be in a liquidity trap.
C) full monetary saturation.
D) a situation in which a nation must use caution, since monetary policy is "super" effective.

Question

Quizplus · Accepted Answer

The zero lower bound refers to a situation when interest rates are so low that monetary policy becomes ineffective as it can no longer stimulate the economy. This may lead to a liquidity trap, in which individuals and firms hoard money instead of spending or investing, further exacerbating the economic downturn. Thus, option B is the correct answer. Option A and C do not accurately describe a specific economic phenomenon. Option D is incorrect as low interest rates actually limit the effectiveness of monetary policy, rather than making it "super" effective.

When the Interest Rate Is So Low That the Opportunity