Which of the following monetary policy tools is more effective when the economy faces the interest rate zero-lower-bound problem?
A)open market operation
B)discount policy
C)required reserve ratio
D)the Fed's liquidity provision

Question

Quizplus · Accepted Answer

When the interest rate reaches zero or near-zero, open market operations and discount policy become ineffective. Required reserve ratio may lead to further contraction of economic activity. In such a scenario, the Fed's liquidity provision comes into play. It involves injecting liquidity into the financial system through various channels such as Term Auction Facility, Commercial Paper Funding Facility, etc. This helps to ease credit conditions, reduce borrowing costs, and stimulate economic activity. Hence, D is the most effective monetary policy tool in a zero-lower-bound situation.

Which of the Following Monetary Policy Tools Is More Effective