Which of the following would most likely result from the Fed imposing negative nominal interest rates in response to a financial crisis and recession?
A)The negative interest rates would stimulate massive borrowing and spending, triggering rapid inflation in the short term.
B)It would signal trouble to financial markets, causing people to deposit more money in banks to enhance feelings of financial security.
C)Banks would freeze customer accounts so that they couldn't withdraw money, inciting financial panic.
D)Customers would withdraw deposits, banks would have less money to lend, and the money supply and aggregate demand would both fall.

Question

Quizplus · Accepted Answer

Negative nominal interest rates can lead to customers withdrawing their deposits to avoid paying banks to hold their money, reducing the banks' ability to lend, which can decrease the money supply and aggregate demand.

Which of the Following Would Most Likely Result from the Fed