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MicroS06-I.5

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Question from Past Microeconomics Qualifying ExamEdit

Spring 2006 - Section I, Question five, George Mason University

T, F, U. State first whether the following statements are true, false or uncertain. Then briefly explain your reasoning in four or five sentences. You may use a graph if it helps clarify your answer.

Negative interest rates are possible but not probable.

AnswerEdit

False. The real interest rate cannot be negative. A negative nominal interest rate is possible if there is deflation.

IS THIS BACKWARDS? Delete this if not, but please see Zero interest rate policy first for an example. I think negative real would be strange because it implies you value the future more than the present, but negative nominal can't happen because no one would pay a person to borrow their money.
on the other hand, consider Prof. Brian Caplan's negative interest rate plan as well over at EconLog. But if the Fed has never done this, maybe it can't be done?

TRUE: Negative interest rate are possible under a liquidity trap scenario, which happened, I believe during the Hamilton era, when wary investors paid "above par" for government bond, so it is possible, and it did happen before

TRUE: Refere to H&H chapter 14, q.6.a, answer in the back of the book. If you expect a good to be so scarce in the future, you will be willing to pay more for it now, Po = (1+r).P1, however, r cannot be less that -100%, otherwise Po will have to be negative

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This micro-stub needs improving.

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