Question #37

If the central bank offered no return on overnight bank reserves then

• running budget deficits would drive overnight interest rates down to zero.
• running budget deficits would force banks to stop lending because they would not want non-performing reserves.
• running budget deficits would drive interest rates up because it would create a scarcity of available loanable funds.

Answer #383

Answer: running budget deficits would drive overnight interest rates down to zero.

Explanation

Please read The interest rate should be set to zero or post a comment for further discussion