The liquidity trap refers to the

a. assumption that the money supply curve is vertical as a result of the Fed's control.

b. problem that occurs when interest rates reach such high levels that no individuals want to hold their wealth in the form of money.

c. situation that occurs when an excess supply of money results in people holding more money than they desire.

d. possibility that interest rates drop so low that people willingly hold all the additions to the money supply, rather than use it to buy bonds

Question

Business

Madalyn Gill

28 November, 00:20

The liquidity trap refers to the

a. assumption that the money supply curve is vertical as a result of the Fed's control.

b. problem that occurs when interest rates reach such high levels that no individuals want to hold their wealth in the form of money.

c. situation that occurs when an excess supply of money results in people holding more money than they desire.

d. possibility that interest rates drop so low that people willingly hold all the additions to the money supply, rather than use it to buy bonds

+4

Answers (1)

Know the Answer?

Rocco Lewis · Answer 1

The answer is d. possibility that interest rates drop so low that people willingly hold all the additions to the money supply, rather than use it to buy bonds

Explanation:

A liquidity trap is a situation in which interest rates are low and savings rates are high. It occurs when monetary policy becomes ineffective because, despite zero/very low-interest rates, people want to hold cash rather than spend or buy illiquid assets