Monetary policy is difficult when interest rates are low. For example, in the early 2000s, the Bank of Japan lowers the interest rate to 0.01 percent with little effect on investment. In the US during the Great Depression, monetary policy also had little effect on investment. Initially, during the recession of 2009-2010, the Fed’s policy of low interest rates had seemingly little impact on the economy.
a. Why do you think it is difficult for monetary policy to be effective when interest rates are very low?
b. Do you think the Fed uses monetary policy to direct the economy to everyone’s benefit (i.e., both bondholders and workers)? Why or why not?
Be sure to give an example in Part A.
Source: Copied & Paraphrased from Colander (2010), Macroeconomics, 8th Edition