As the Fed maintained interest rates at near zero during 2008-2012,
A) the economy recovered and the unemployment rate fell to normal levels.
B) households and businesses held larger money balances and the velocity of money fell substantially.
C) stock prices declined during 2010-2012, causing the economy to remain weak.
D) the earnings senior citizens derived from saving deposits and other forms of savings rose substantially, leading to higher incomes and a strong increase in aggregate demand.

Question

Quizplus · Accepted Answer

When interest rates are low, households and businesses tend to hold larger money balances and the velocity of money falls, meaning that money is not changing hands as rapidly in the economy. This can lead to a weaker economy overall despite the low interest rates. The other choices are not supported by the evidence.

As the Fed Maintained Interest Rates at near Zero During