The nominal interest rate cannot fall below zero because
A) central banks are engaged in interest rate targeting.
B) inflation is generally too high.
C) inflation is generally too low.
D) financial markets cannot allow for arbitrage opportunities.
E) financial markets do allow for arbitrage opportunities.

Question

Quizplus · Accepted Answer

If nominal interest rates were to fall below zero, it would create arbitrage opportunities, as investors could profit by borrowing at negative rates and holding cash, which would not lose value.

The Nominal Interest Rate Cannot Fall Below Zero Because