ECONOMICS
MONETARY POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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stimulate the economy by encouraging banks to lend out the deposits they were keeping at the central bank.
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increase bank’s cost to holding cash.
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prevent banks from paying positive interest rates to their depositors.
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make banks less likely to lend.
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Detailed explanation-1: -A negative interest rate policy (NIRP) occurs when a central bank sets its target nominal interest rate at less than zero percent. This extraordinary monetary policy tool is used to strongly encourage borrowing, spending, and investment rather than hoarding cash, which will lose value to negative deposit rates.
Detailed explanation-2: -Negative interest rates are an unconventional, and seemingly counterintuitive, monetary policy tool. With negative interest rates, cash deposited at a bank yields a storage charge, rather than the opportunity to earn interest income; the idea is to incentivize loaning and spending, rather than saving and hoarding.
Detailed explanation-3: -Several, including the European Central Bank and the central banks of Denmark, Japan, Sweden, and Switzerland, have started experimenting with negative interest rates-essentially making banks pay to park their excess cash at the central bank.
Detailed explanation-4: -Intuitively, a decline in the policy rate creates a disincentive to receive deposits, since some reserves would be kept at the central bank earning a negative rate. This decreases the fraction of banks that take deposits, allowing all banks to increase their loan interest rates.