There is one important restriction on the Federal Reserve's power to set interest rates:
A) it cannot decrease nominal interest rates below the rate of inflation.
B) it cannot decrease nominal interest rates below the expected returns on stocks.
C) it cannot decrease nominal interest rates below zero.
D) it cannot affect long-term interest rates.

Question

Quizplus · Accepted Answer

The Federal Reserve's power to set interest rates is indeed restricted by the practical limitation that it cannot decrease nominal interest rates below zero, a boundary known as the "zero lower bound." While there are instances of negative interest rates in some economies, this is generally seen as an unconventional monetary policy tool. The other options are not strict limitations on the Federal Reserve's powers.

There Is One Important Restriction on the Federal Reserve's Power