It is agreed by many economists that we are currentlyentering a period of secular stagnation. EconomistLawrence Summers, who was a former economic advisor for both Clinton and Obama administrations, wrote in a 2016 article, The Age of Secular Stagnation., to brieflydefine the theory of secular stagnation. He stated, The economies of the industrial world, in this view, suffer from an imbalance resulting from an increasing propensity to save and a decreasing propensity to invest. The result is that excessive saving acts as a drag on demand, reducing growth and inflation, and the imbalance between savings and investment pulls down real interest rates.

The problem of secular stagnation could have been alleviated when the central bank conducts expansionary monetary policy say by lowering the nominal interest rate, however, it is also a widely seen phenomenon that many countries nowadays already having too low nominal interestrates or even arriving at the zero lower bound (ZLB), which leaves no room for the nominal interest rate to be furtherlowered.

Discuss the effectiveness of an expansionary monetary policy to increase the money supply in an economy where the nominal interest rate is at its ZLB. (10 marks)