EBK THE ECONOMICS OF MONEY, BANKING AND
EBK THE ECONOMICS OF MONEY, BANKING AND
4th Edition
ISBN: 8220100668203
Author: Mishkin
Publisher: PEARSON
Question
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Chapter 24, Problem 22Q
To determine

To Explain:

The reason why the aggregate demand curve becomes upward sloping when the policy rate reaches a floor of zero

Concept introduction:

Zero-Lower Bound: The nominal rate of interest has some lower bound. It cannot fall beyond that point. Realistically the nominal rate of interest can be slightly negative as depositors may agree to pay the bank a small amount for keeping their money safe or for providing the convenience of quick money. But for the sake of simplicity of theoretical analysis, it has been assumed by the economists that nominal interest rate cannot be negative. If the central bank finds that the desired real interest rate needs a negative nominal rate of interest, it will set the nominal interest rate to zero. This is known as zero lower bound.

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