A situation in which further increases in the money supply (liquidity) do not lower interest rates is known as a liquidity trap. Oan asymptotic limit. credit crunch. Oa Fed's failure. None of these.
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An economy is said to be in the liquidity trap when the short-term nominal interest rate on government bonds is down to zero. But when this interest rate is equal to zero, many other interest rates may still be positive. This raises the issue of whether the central bank can decrease some of those other interest rates by buying some of the corresponding assets directly. Such actions go by the name of credit easing, or qualitative easing, or targeted easing. These actions need not lead to an increase in the money supply: This depends on whether the purchases of specific assets are offset by sales of other assets. In most cases, however, credit easing has been associated with an increase in the money supply. We looked at the effects of such actions by the Fed in the Focus box in Chapter 17. To summarize, the verdict is still out. When, for some reason, investors are forced or decide to leave a specific market, the central bank can, in effect, replace them and thus limit the increase in that market's interest rate. When, however, markets function well and investors arbitrage across markets, the effects of central bank purchases are likely to be limited. To summarize: While unconventional monetary policy tools can help, they do not work as reliably as does conventional monetary policy, namely movements in the short-term nominal interest rate. Even taking unconventional monetary policy tools into account, being in the liquidity trap considerably reduces the scope of monetary policy. Explain
Nick J.
The phenomenon where traditional tools of monetary policy become ineffectual as (nominal) interest rates approach or hit zero (aka the zero lower bound) is known as the liquidity trap, inelastic investment demand, the paradox of thrift, Beibermania, or inelastic money demand.
Roee S.
Statement 1:There exists an inverse relationship between market rates of interest and price of bond Statement 2:The liquidity trap is a situation when at some very low rate of interest all asset holders become bears Group of answer choices statement one is incorrect and two is correct statement one is correct and two is not correct both are incorrect both are correct
T. L.
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