Discuss the circumstances under which monetary and fiscal policy multiplier are each, in turn,equal to zero .Explain in word why this can happen and how likely you think this is?
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Multiplier:
Multiplier can be defined as an economic factor that shows an increase in one economic variable because of an increase in another economic variable. It can be used to determine the increase in the total income of the economy because of an increase in government spending.
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Monetary and Fiscal policy are the tools that influence a nation's economy.
- Monetary policy zero-bound is a situation in which the central banks lower the short-term interest rates to zero. This is done to stimulate the economy of the country.
- In the case of Fiscal policy, when the interest rates are at zero and it has remained the same for a long period of time, and inflation is also high, then the fiscal policy should be active and contribute to stabilization.
- These are the conditions in which both monetary and fiscal policy becomes zero.
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