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brilliants [131]
3 years ago
12

Why does the​ self-correcting mechanism stop working when the policy rate hits the zero lower​ bound?

Business
1 answer:
Alex73 [517]3 years ago
4 0

The available options

A. The​ self-correcting mechanism stops working because the falling inflation produced by a negative output gap produces higher rather than lower real interest rates when the policy rate hits the zero lower​ bound, and this increase depresses planned spending and further widens the output gap.

B. The​ self-correcting mechanism stops working because the falling inflation produced by a negative output gap produces lower rather than higher real interest rates when the policy rate hits the zero lower​ bound, and this decrease depresses saving and investment and therefore further widens the output gap.

C. The​ self-correcting mechanism stops working because the rising inflation produced by a negative output gap produces lower rather than higher real interest rates when the policy rate hits the zero lower​ bound, and this decrease depresses planned spending and further widens the output gap.

D. The​ self-correcting mechanism stops working because the rising inflation produced by a positive output gap produces lower rather than higher real interest rates when the policy rate hits the zero lower​ bound, and this decrease enhances planned spending and further widens the output gap.

Answer:

A

Explanation:

For a given situation in the question above the correct answer is Option A, which is: The​ self-correcting mechanism stops working because the falling inflation produced by a negative output gap produces higher rather than lower real interest rates when the policy rate hits the zero lower​ bound, and this increase depresses planned spending and further widens the output gap.

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