Which of the following is false about a liquidity trap situation:
A)The Fed could not appreciably raise 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)Expansionary monetary policy would tend to increase excess reserves in the banking system.

Question

Which of the following is false about a liquidity trap situation:​
A)​The Fed could not appreciably raise 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)​Expansionary monetary policy would tend to increase excess reserves in the banking system.

Quizplus · Accepted Answer

In a liquidity trap, the Federal Reserve (or any central bank) can indeed lower short-term interest rates, often to near zero, in an attempt to stimulate economic activity. The statement that the Fed could not appreciably raise short-term interest rates is false because the characteristic of a liquidity trap is that interest rates are already very low and cannot be lowered significantly further, not that they cannot be raised.

Which of the Following Is False About a Liquidity Trap