Recall Application 1, "Avoiding a Liquidity Trap," to answer the following questions:
-Which of the following is the warning sign that the economy was facing a looming liquidity trap?
A) The short- term interest rates were already at 0.5 percent.
B) The 30- year mortgage rate was approaching 5 percent.
C) The US national debt was approaching $10 trillion.
D) The bank reserves were approaching zero percent.

Question

Quizplus · Accepted Answer

A liquidity trap occurs when short-term interest rates reach zero, making it difficult for monetary policy to stimulate the economy. Therefore, the fact that the short-term interest rates were already at 0.5 percent is a warning sign that the economy was facing a looming liquidity trap. The other options (B, C, and D) are not directly related to the concept of a liquidity trap.

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