A Liquidity Trap Occurs When

question 89

Multiple Choice

A liquidity trap occurs when:

• A) banks have too much currency and close their doors to new customers.
• B) the central bank mistakenly prints too much money, generating hyperinflation.
• C) interest rates fall so low that monetary policy is no longer effective.
• D) dams and locks are built to prevent flooding.

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Definitions:

Average Cost Curve

A graph that illustrates the cost per unit of output by dividing the total cost by the quantity of output produced, typically showing how costs fluctuate with changes in scale.

Marginal Cost Curve

A graph that shows the increase in cost incurred by producing one more unit of a good or service.

U-Shaped

Characterizes graphs or functions that have a visible dip in the middle, creating a shape similar to the letter "U," often found in economic analyses representing cost curves.

Cost Function

A mathematical description of how production costs vary with changes in the quantity of output produced.