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Part $1$

Figure$14-2$ shows that$$ Japan's short$-$term interest rates have had periods during which they are near or equal to zero. Is the fact that the yen interest rates shown never drop below zero a$$ coincidence, or can you think of some reason why interest rates might be bounded below by$$ zero?

A$.$

Yes. As interest rates$$ fall, people prefer to hold more cash and fewer financial assets. Interest rates will not go below zero because the negative return on financial assets would be dominated by the zero return on$$ cash; therefore, no one would hold financial assets.

B$.$

Yes. The Federal Reserve has the regulatory authority to set minimum and maximum interest$$ rates, which are currently set at a minimum of $1$ percent and maximum of $32$ percent.

C$.$

No$.$ Although it is very unlikely that interest rates would ever go below$$ zero, they are determined by economic forces in the financial markets and can be positive or negative.

D$.$

No$.$ It is theoretically possible under conditions of hyper deflation$($such as occurred during the Great$$ Depression$)$ that real interest rates could be positive even though nominal interest rates are below zero.