Question

​"The zero-lower-bound on​ short-term interest rates is not a​ problem, since the central bank can just use quantitative easing to lower intermediate and​ longer-term interest rates​ instead." Is this statement​ true, false, or​ uncertain? Explain your answer.

Answer 1

False

Step-by-step explanation:

Because Quantitative easing is a policy used by government to stimulate the economy, under this policy government purchase large government bonds and other financial assets to inject the liquidity in economy.

When Zero lower bound on short term interest rates are close to zero or at zero it is not possible to lower the interest rate below the existing one. Thus, the monetary policy that will further lower the interest rates to stimulate the economy is not effective. The situation is popularly known as liquidity trap. People will prefer to keep cash in hand instead of investing it somewhere because of low interest rate.

Hence, central bank cannot lower the interest rate to stabiles the economy by quantitative easing.

The provided statement is. False