Question

In: Finance

3.major negative effects of a prolonged zero-interest rate policy on savings, consumption, and investments.

3.major negative effects of a prolonged zero-interest rate policy on savings, consumption, and investments.

Solutions

Expert Solution

Prolonged zero interest rates can have negative impact for the economy as it can push the economy into a liquidity trap.

The zero interest rates will always have an adverse impact in long run by negatively impacting the margin of profits of different banks as they are bound to lend more but the margin of profits has substantially gone down.

this will also have a negative impact on overall savings in the economy as people would be less inclined to save as there are no offerings on interest on their savings so so they are lacking behind as their value of money will be decreasing with the time value of money. concept

It will push people into you getting easy money by borrowing and investing and consuming, that could be a bad habit in the long run as when there is a flattening of the curve and the economy starts to strengthen and then the problem arises as people are not able to change their habits and cope up with additional rates.


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