Question

What is Zero Lower Bound and How does it occur? What are some tools Federal Reserve have used to help the economy after facing Zero Lower Bound?

Answer 1

Answer :Zero Lower bound means that is  a macro economic problem which is associated with short term Nominal interest rate is at or near zero. It has been causing a liquidity trap and limiting the central bank capacity to stimulate growth of an economy.

It occurred because nominal interest rate has been zero or near zero. It has been causing liquidity trap in an economy.

Some tools federal reserve have used to overcome the problem of zero coupon bonds are :

• Forward guidance : It means that communication from a central bank about the state of an economy and likely future course of monetary policy .It is verbal assurance from a country central bank.
• Quantitative easing : It means that increasing the money supply through electronically creating money supply in an economy. It has been stimulating in an economy and control money supply in an economy.