Which of the following is true about a liquidity trap situation:
A)Quantitative easing might be a more effective strategy to stimulate the economy than buying short term government securities.
B)Quantitative easing may be able to affect long term interest rates even when the Fed is unable to appreciably lower short term interest rates.
C)The Fed cannot easily reduce the fed funds interest rate.
D)All of the above are true.

Question

Which of the following is true about a liquidity trap situation:​
A)​Quantitative easing might be a more effective strategy to stimulate the economy than buying short term government securities.
B)​Quantitative easing may be able to affect long term interest rates even when the Fed is unable to appreciably lower short term interest rates.
C)​The Fed cannot easily reduce the fed funds interest rate.
D)​All of the above are true.

Quizplus · Accepted Answer

A liquidity trap is a situation in which interest rates are very low and changes in the monetary policy have little or no effect on the economy. In this situation, quantitative easing (QE) might be a more effective strategy to stimulate the economy than buying short-term government securities. This is because QE involves the purchase of long-term government securities, which can help to reduce long-term interest rates and stimulate borrowing and investment. Moreover, quantitative easing may be able to affect long-term interest rates even when the Fed is unable to appreciably lower short-term interest rates. Additionally, in a liquidity trap situation, the Fed cannot easily reduce the fed funds interest rate because it is already close to zero. Therefore, all of the above statements are true.

Which of the Following Is True About a Liquidity Trap