A Liquidity Trap Occurs When

question 85

Multiple Choice

A liquidity trap occurs when

• A)any additions to the monetary base are held as cash by people or reserves at banks.
• B)the Fed increases the money supply, causing the expected inflation rate to rise more than the real interest rate declines, so that the nominal interest rate increases.
• C)there are runs on banks that are solvent but illiquid.
• D)the demand for loans increases in a country on the gold standard, so that the monetary supply is not able to increase and interest rates rise dramatically.

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Definitions:

Merchandiser

A business or person that purchases goods for resale at a profit.

Debit Balances

Accounts on the left side of the double-entry bookkeeping system that typically include assets and expenses, increased by debits.

Adjusted Trial Balance

A statement showing the balances of all accounts, including adjustments, at the end of an accounting period to ensure the total debits equal total credits.

Perpetual Inventory Method

An inventory management system that continuously updates the quantity and value of inventory on hand and sold, using real-time data.