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:

Negative Reinforcement

A method in behavioral psychology that increases the likelihood of a behavior by removing an unpleasant stimulus when the behavior occurs.

Discrimination

Biased or unfair behavior towards various groups of individuals, particularly based on their racial background, age, or gender.

Cognitive Perspective

A psychological approach focusing on how people perceive, think, understand, and remember information.

Classical Conditioning

An educational method where connections are made between an external trigger and an innate response.