A Situation in Which the Fed's Target Interest Rate Has

question 107

Multiple Choice

A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a

• A)liquidity preference.
• B)liquidity trap.
• C)open-market trap.
• D)interest-rate contraction.

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Definitions:

Expansionary Gaps

Situations where actual GDP exceeds potential GDP, leading to inflationary pressure due to high demand.

Contractionary Gaps

Contractionary gaps occur when an economy’s actual output is lower than its potential output, often leading to unemployment and underutilized resources.

Aggregate Demand

The total demand for all goods and services within an economy at various price levels, in a given time period.

Expansionary Gap

A situation where the actual economic output exceeds the potential output, often leading to inflation.