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10.When monetary policy is constrained by the Zero Lower Bound, the economy risks entering a deflationary...

10.When monetary policy is constrained by the Zero Lower Bound, the economy risks entering a deflationary spiral because

real interest rates no longer react to aggregate demand shocks.

declines in inflation imply increases in real interest rates, which in turn lead to further declines in aggregate demand and thus inflation.

aggregate supply becomes downward sloping.

All of the above.
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Answer #1

ALL OF THE ABOVE. because, zero-bound is a tool by Monetary Authority of India that is RBI lowers short-term interest rates to zero. It means that Central Bank can no longer use interest rates to stimulate the economy, and people also called it as a Liquidity Trap. It is the situation of interest rates which can't fall below 0%. When monetary policy is constrained by zero lower bounds, interest rates can have no role in the aggregate demand. It also occurs when inflation goes below some critical value.

Inflation Oulput

From this graph we can easily determines that how demand and supply fall downwards when there is zero lower bound.

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