Question

Since the end of the Great Recession, interest rates have been at historic lows—in some cases, close to zero. How is expansionary monetary policy supposed to work? How do near-zero interest rates limit the ability of expansionary monetary policy to work?

Answer 1

With an expansionary monetary policy the Fed decreases the interest rate in the market that increases the marginal efficiency of captial and make the borrowing cheaper, at a lower interest rate the business firms in the market will borrow more and increased investment in the market will increase the demand.

But at times when the interest rate is close to zero or zero bound and the demand is still not increasing, the Fed has limited options and they cannot do much. In such a situation they can only try helicopter money i.e. giving out money to the people and expecting them to spend more. But this has not been done till now.