During the economic crisis of 2008-10, efforts to keep inflation pinned at 2%:
A)made things more difficult, since nominal interest rates cannot fall below zero.
B)made things more difficult, since nominal interest rates cannot rise above zero.
C)made things easier, since nominal interest rates cannot fall below zero.
D)made things easier, since nominal interest rates cannot rise above zero.

Question

Quizplus · Accepted Answer

Central banks, like the Federal Reserve in the United States, typically target a certain level of inflation, often around 2%, as part of their monetary policy framework. During the economic crisis of 2008-2010, central banks faced the challenge of stimulating economies that were in recession or on the brink of recession. One of the primary tools for stimulating the economy is cutting interest rates, which can encourage borrowing and investment, and in turn, help to boost economic activity.
However, when interest rates are already at or near zero, central banks encounter what is known as the "zero lower bound" problem. This is the situation described in option A, where nominal interest rates cannot fall below zero (or, more accurately, they can't easily go below zero without causing significant disruptions in the financial system). When nominal rates are at zero, central banks have less room to maneuver to stimulate the economy through traditional interest rate cuts. This can make it more difficult to combat deflationary pressures and to support the economy during a downturn.
Therefore, during the 2008-2010 crisis, keeping inflation at 2% was challenging because the zero lower bound on nominal interest rates limited the effectiveness of conventional monetary policy tools. Central banks had to resort to unconventional measures, such as quantitative easing, to provide additional stimulus.

During the Economic Crisis of 2008-10, Efforts to Keep Inflation