A situation in which further increases in the money supply (liquidity) do not lower interest rates is known as
A)a liquidity trap.
B)an asymptotic limit.
C)credit crunch.
D)a Fed's failure.
E)None of these.

Question

Quizplus · Accepted Answer

A liquidity trap refers to a scenario where interest rates are close to zero and injecting additional liquidity into the economy does not result in a substantial increase in lending and borrowing activities, as individuals and businesses are hesitant to take on more debt even at very low-interest rates. Hence, a liquidity trap is a situation in which further increases in the money supply (liquidity) do not lower interest rates.

A Situation in Which Further Increases in the Money Supply