This case is depicted in Fig

Accommodating monetary policy is intended to

This makes borrowing easy for business, which stimulates investment and expansion of operations. First, the change in money supply may not lead to a change in rate of interest. We embarked upon large-scale purchases of long-term Treasury securities and agency mortgage-backed securities. The possible benefit of such a restrictive rate move would be to reduce risks that might be forming in the nooks and crannies of a highly complex financial system.

However, in a fully employed economy crowding out of fiscal stimulus occurs through a different route. On the one hand, the existing large shortfalls in aggregate demand call for highly accommodative monetary policies and historically low interest rates. On several occasions, to underscore this risk, I have been presented with a gift of a Zimbabwe trillion dollar note. Bank capital stress tests are one well-known addition to our supervisory toolkit.

One simple but important tool is enhanced monitoring. It will be seen from the new equilibrium at point B that the interest rate falls only slightly and as a result real national income hardly increases to have any impact on the recessionary conditions. Even before the recent financial crisis, central bankers were well aware of the key role played by stable financial markets in economic activity.

In fact, I am concerned that inflation will not pick up quickly enough. Due to unemployment resources, there will not be much increase in price level when aggregate demand increases.

This means rise in interest rate has completely wiped out the expansionary effect on the level of real national income by crowding out private investment. Through arbitrage and portfolio rebalancing, lower rates in one market are transmitted to other interest rates faced by investors, nonfinancial firms and consumers.

Our progress toward the inflation target is not noticeably faster by this metric either. Today, I would like to make three points concerning the U. The liquidity trap is a situation in which the public is prepared at a given rate of interest to hold whatever money is supplied. Financial stability risks are more complicated. Finally, the aggregate output adjusts to the changes in aggregate demand.

Our progress toward the inflation targetToday I would like to