Policy Limitations at the Interest Rate Floor
Imagine an economy where the central bank's main policy interest rate is already at its absolute minimum of 0%. If the central bank wants to further stimulate the economy by making borrowing even cheaper (i.e., lowering the real cost of borrowing), what must happen to the public's expectations about future price levels? Explain your reasoning using the relationship between nominal rates, real rates, and expected price level changes.
0
1
Tags
Economics
Economy
Introduction to Macroeconomics Course
Ch.5 Macroeconomic policy: Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
CORE Econ
Social Science
Empirical Science
Science
Analysis in Bloom's Taxonomy
Cognitive Psychology
Psychology
Related
A central bank has set its policy nominal interest rate to its absolute minimum of 0% in an attempt to stimulate a struggling economy. If the public's expectation for inflation over the next year is 2.5%, what is the resulting real interest rate?
In an economy where the policy nominal interest rate is fixed at its lowest possible value of 0%, an increase in the public's expectation of future inflation will lead to a decrease in the real interest rate.
Economic Stimulus Challenge at the Interest Rate Floor
Policy Limitations at the Interest Rate Floor