The Liquidity Trap Refers to the Situation Where

question 84

Multiple Choice

The liquidity trap refers to the situation where

• A) the Fed adds excess reserves to the banking system, but it has minimal positive effect on lending, investment, or aggregate demand.
• B) excessive consumer debt limits the growth in consumer spending necessary to bring the economy out of recession.
• C) the public debt is so large that federal borrowing drives up interest rates and discourages private sector spending.
• D) a financial crisis causes a run on banks and the elimination of billions in excess reserves.

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Definitions:

Informational Social Influence

The influence to accept information from others as evidence about reality, often leading to conformity in ambiguous situations.

Cognitive Dissonance Theory

A psychological theory that explains the discomfort that arises from holding two conflicting beliefs, leading to changes in attitudes, beliefs, or behaviors.

Role-Playing Theory

A theory suggesting that much of behavior is influenced by society's expectations and that individuals perform roles they have learned based on social norms and expectations.

Attribution Theory

A concept in social psychology that explains how individuals infer the causes of their own and others' behavior, distinguishing between internal dispositions and external situations.