The central bank of a country facing economic and financial market difficulties asks for your advice. the bank cut its policy interest rate to the effective lower bound, but it wasn't enough to stabilize the economy. drawing on the actions taken by the federal reserve during the financial crisis of 2007-2009, what might you advise this central bank to do? multiple choice
1) you should advise the central bank to use unconventional monetary policy tools such as quantitative easing. a pollcy in which the central bank alters the compostion of its balance sheet or credit easing, where aggregate reserves are provided beyond the level needed to lower the policy rate to zero. the central bank could also inform markets of its commitment to keep interest rates low (forward guidance).
2) because the central bank has hit the zero bound with its policy iinterest rate, there is nothing further it can do to influence economic and financial market conditions
3) in the face of severe economic weakness you should advise the central bank to increase its pollcy rate significantly in order to stimulate economic growth and encourage lending.
4) you should advise the central bank to use unconventional monetary policy tools such as quantitative easing. where aggregate reserves are provided beyond the level needed to lower the polcy rate to zero, or credit easing. a policy in which the central bank alters the composition of its balance sheet. the central bank could also inform markets of its commitment to keep interest rates low (forward guidance).