Question

What is a liquidity trap? When deflation occurs because growing debt obligations cause a decrease in aggregate demand. When increasing price levels result in fixed-income earners "drowning" as expenses grow while income remains constant. When expansionary monetary policy results in a rapidly increasing price level. When nominal interest rates cannot be lowered any further. Which of these statements about liquidity traps is false? Expansionary monetary policy is difficult to achieve. Firms are unlikely to undertake investment during liquidity traps because interest rates are prohibitively high. The United States probably experienced a liquidity trap during the Great Depression. The zero bound of interest rates prevents policy makers from taking some actions that could stimulate economic growth.

Answer 1

Answer: 1. Option (d) is correct.

2. Option (b) is correct.

Step-by-step explanation:

Liquidity trap is a situation in which interest rate are too low and saving rate is too high. So, in this situation consumers avoid to hold any bond and keep their money into the savings account because they expect that interest will increase in the future.

Monetary policy also become ineffective in the situation of liquidity trap. So, further increase in the money supply have not an impact on government spending and investment.

Because nominal interest rate is falling during the situation of liquidity trap, then they cannot be lowered any further.

Lower interest rate attract the investors to further increase their investments. During the liquidity trap, interest rates are low and investments are high. So, firms are unlikely to undertake investment during liquidity traps.