In a binding situation,
A) only changes in the price level change the interest rate.
B) only changes in the Z factors change the interest rate.
C) changes in neither the price level nor in the Z factors change the interest rate.
D) the interest rate is always negative.

Question

Quizplus · Accepted Answer

In a binding situation, such as when the interest rate hits the lower bound (e.g., zero or slightly negative), traditional mechanisms for changing the interest rate through monetary policy (like adjusting the price level or external factors, often referred to as Z factors, which can include fiscal policy, preferences, technology changes, etc.) are ineffective. This means the interest rate cannot be adjusted downwards through these means, hence changes in neither the price level nor in the Z factors change the interest rate.

In a Binding Situation