You and a friend are debating the merits of using monetary policy during a severe recession. Your friend says that the central bank needs to lower interest rates all the way down to zero. According to him, zero nominal interest rates will boost lending and investment; consumers and firms will surely borrow and spend when interest rates are zero. Given that inflation in your country is currently 3 percent, would you agree with his reasoning? Explain your answer.

Question

Business

Addison Stout

12 May, 10:48

You and a friend are debating the merits of using monetary policy during a severe recession. Your friend says that the central bank needs to lower interest rates all the way down to zero. According to him, zero nominal interest rates will boost lending and investment; consumers and firms will surely borrow and spend when interest rates are zero. Given that inflation in your country is currently 3 percent, would you agree with his reasoning? Explain your answer.

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Answers (1)

Know the Answer?

Luke Ramsey · Answer 1

The correct answer is "yes, I agree with his reasoning"

Explanation:

Zero nominal interest rate joined with a three percent inflation rate yields a negative connotation for the real rate, which is the rate that is important for investment decisiveness.