A negative nominal interest rate may not be good policy because
A)could produce inefficiencies in the banking system.
B)it makes investment go down.
C)could produce inefficiencies at Federal Reserve Banks.
D)it makes the output gap go up.
E)it makes consumers too optimistic, and the economy overheats.

Question

Quizplus · Accepted Answer

A negative nominal interest rate could produce inefficiencies in the banking system because it reduces the profitability of banks, potentially leading to reduced lending and higher risk-taking by banks to compensate for their reduced profits. Additionally, it could lead to a flight to cash if depositors start withdrawing their money from banks to avoid negative interest rates, which would undermine the stability of the banking system.

A Negative Nominal Interest Rate May Not Be Good Policy