Recall Application 1, "Avoiding a Liquidity Trap," to answer the following questions:
-What was the policy adopted by the Fed in response to the looming liquidity trap?
A) Do nothing and wait for interest rates to rise.
B) Increase the money supply.
C) Pay interest on bank reserves.
D) Increase the reserve requirement.

Question

Quizplus · Accepted Answer

The policy adopted by the Fed in response to the looming liquidity trap was to pay interest on bank reserves. This would incentivize banks to hold excess reserves with the Fed, rather than lending them out and potentially causing deflationary pressures. Options A, B, and D would not effectively address the liquidity trap or could potentially make it worse.

Recall Application 1, "Avoiding a Liquidity Trap," to Answer the Following