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 i your country is currently percent, would you agree with his reasoning? Explain your answer. O A. No, a zero nominal interest rate coupled with a 3 percent inflation rate yields a positive value for the real rate, and this will very likely discourage investment spending. O B. No, a slumping economy responds poorly to interest rate reductions, especially when nominal rates approach zero. The preferred policy option is expansionary fiscal policy. O c. Yes, a zero nominal interest rate means that money is costless to borrow, and this is sure to spur investment spending in the economy. O D. Yes, a zero nominal interest rate coupled with a 3 percent inflation rate yields a negative value for the real rate, which is the rate that is meaningful for investment decisions.

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 i your country is currently percent, would you agree with his reasoning? Explain your answer. O A. No, a zero nominal interest rate coupled with a 3 percent inflation rate yields a positive value for the real rate, and this will very likely discourage investment spending. O B. No, a slumping economy responds poorly to interest rate reductions, especially when nominal rates approach zero. The preferred policy option is expansionary fiscal policy. O c. Yes, a zero nominal interest rate means that money is costless to borrow, and this is sure to spur investment spending in the economy. O D. Yes, a zero nominal interest rate coupled with a 3 percent inflation rate yields a negative value for the real rate, which is the rate that is meaningful for investment decisions.

Principles of Economics, 7th Edition (MindTap Course List)

7th Edition

ISBN:9781285165875

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter35: The Short-Run Trade-off Between Inflation And Unemployment

Section: Chapter Questions

Problem 5PA

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