In the recent financial and economic crises, the economy fell into a so-called liquidity trap, which means that:

Question

Quizplus · Accepted Answer

A liquidity trap occurs when people and banks hoard money instead of spending or lending it. In a liquidity trap, central banks inject money into the banking system, but it does not stimulate the economy because banks and individuals hold on to that money instead of spending or lending it. In the recent crisis, banks held on to excess reserves provided by the Fed instead of lending, and people chose to pay off loans rather than spend, leading to a liquidity trap. Therefore, option D is the correct choice.

In the Recent Financial and Economic Crises, the Economy Fell