Explain binding situation and discuss what happens when there is zero interest rate bound.

Binding situation is the state of the economy in which the Federal Reserve calls for a negative interest rate! A negative interest rate means that instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank.

Zero-bound interest means that the Fed cannot move nominal interest rates below zero. This means that once monetary policy reduces the interest rate to zero, or near zero, there is nothing more it can do (there is no way you would ever pay someone to borrow your money). At that point monetary policy can stimulate the economy no more.

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