A liquidity trap refers to a situation in which:
A)taking away liquidity from the banks has a major positive effect on lending.
B)adding liquidity to banks has major positive effects on lending.
C)adding liquidity to banks has little or no positive effects on lending.
D)taking away liquidity to banks has a major negative effect on lending.

Question

Quizplus · Accepted Answer

In a liquidity trap, adding liquidity to banks has little or no positive effects on lending. This is because the interest rate is already so low that further injections of liquidity cannot stimulate borrowing and investment.

A Liquidity Trap Refers to a Situation in Which