In a liquidity trap situation:
A)The Fed could not appreciably lower short term interest rates.
B)If the Fed added reserves to the banking system, it would have little effect on investment.
C)Traditional monetary policy would be relatively weak in its effects on aggregate demand.
D)All of the above are true.

Question

In a liquidity trap situation:​
A)​The Fed could not appreciably lower short term interest rates.
B)​If the Fed added reserves to the banking system, it would have little effect on investment.
C)​Traditional monetary policy would be relatively weak in its effects on aggregate demand.
D)​All of the above are true.

Quizplus · Accepted Answer

In a liquidity trap situation, short term interest rates are already close to zero and cannot be lowered further by traditional monetary policy. Adding reserves to the banking system would also have little effect on investment, as banks would have no incentive to lend out the excess funds. Therefore, traditional monetary policy would be relatively weak in its effects on aggregate demand. All three statements are true.

In a Liquidity Trap Situation:​

In a Liquidity Trap Situation: