When an Economy Is in a Liquidity Trap

question 103

Multiple Choice

When an economy is in a liquidity trap

• A) monetary policy cannot be used to influence the exchange rate.
• B) monetary policy can be used to drive interest rates down, but not to drive them up.
• C) there is an excess demand for bonds.
• D) people and institutions avoid holding cash balances.
• E) it can escape only by introducing a hard, or illiquid, currency.

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Definitions:

Maturity Date

The specified date on a financial instrument at which the principal (or final payment) is due to be paid.

Promissory Note

A financial document in which one party promises in writing to pay a determinate sum of money to another party under specific terms.

Principal

The face amount of the note.

Promissory Note

A written promise to pay a specified sum of money to a designated person at a fixed or determinable future time.