When Interest Rates Are Already at Zero During a Recession

question 38

Multiple Choice

When interest rates are already at zero during a recession, a central bank would:

• A) have little leeway to further reduce interest rates in order to stimulate the economy.
• B) not be able to engage in any type of policy to stimulate the economy.
• C) need to spend more money in order to stimulate the economy.
• D) likely work with Congress to stimulate the economy.

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Definitions:

Long-run Phillips Curve

A concept suggesting that in the long term, there is no trade-off between inflation and unemployment, implying that efforts to reduce unemployment will not lead to higher inflation in the long run.

Long-run Phillips Curve

A graphical representation suggesting that in the long run, there is no trade-off between inflation and unemployment.

Higher Inflation

Higher Inflation occurs when there is a sustained increase in the general price level of goods and services, reducing purchasing power over time.

Long Run

A period in economics where all inputs can be adjusted, and companies can change all factors of production.