When Interest Rates Are near Zero and Traditional Monetary Policy

question 99

Multiple Choice

When interest rates are near zero and traditional monetary policy is ineffective, the Fed or other central bank may resort to a strategy referred to as quantitative easing. What does this strategy involve?

• A) allowing interest rates to rise slowly by providing substantial reserves for as long as is necessary to avoid inflation
• B) reducing the money supply to raise the interest rates slowly without discouraging spending
• C) keeping interest rates very low by providing substantial reserves for as long as is necessary to avoid deflation and encourage spending
• D) increasing the money supply and interest rates at a constant rate to stimulate economic activity

---

Definitions:

Investment Yield

The earnings generated and realized on an investment over a particular period of time, expressed as a percentage of the investment's cost.

Maturity Date

The final payment date of a loan or other financial instrument, at which point the principal (and all remaining interest) is due to be paid.

Compound Annual

The rate of return that would be required for an investment to grow from its beginning balance to its ending one, assuming the profits were reinvested at the end of each period of the investment's lifespan.

Rate of Return

The profit or deficit experienced on an investment during a particular timeframe, represented as a proportion of the investment's initial expense.