Reduction of interest rates was ineffective in fighting the Great Recession because:
A) Congress decreased government spending to balance the budget.
B) crowding-out occurred.
C) the economy was dangerously close to a liquidity trap.
D) businesses and consumers borrowed and spent so much that it caused an inflationary gap.

Question

Quizplus · Accepted Answer

The effectiveness of interest rate reductions in stimulating economic growth and fighting a recession is limited when an economy is already in a liquidity trap. A liquidity trap occurs when interest rates are already so low that monetary policy can no longer stimulate economic growth. Lowering interest rates further in this scenario would not lead to increased borrowing and spending as businesses and consumers are unwilling to take on additional debt, leading to a reduction in overall economic activity. Choices A, B, and D are incorrect because there is no evidence that Congress decreased government spending to balance the budget, crowding-out occurred, or businesses and consumers borrowed and spent so much that it caused an inflationary gap during the Great Recession.

Reduction of Interest Rates Was Ineffective in Fighting the Great