Question

Reduction of interest rates was ineffective in fighting the Great Recession because: A. Congress decreased government...

Reduction of interest rates was ineffective in fighting the Great Recession because: A. Congress decreased government spending to balance the budget. B. the economy was dangerously close to a liquidity trap. C. crowding-out occurred. D. businesses and consumers borrowed and spent so much that it caused an inflationary gap.

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Answer #2

In the recession the reduced interest rate would not help the economy to recover, this is because the when the interest rate is low the the people would tend to save more because they hope that the interest rate in the future rises. So they would not invest, the economy will be close to a liquidity trap. There is inverse relationship between the bond prices and the interest rate so when the interest rate is low people would not buy it, they hope in the the interest rate will rise soon.

Ans: B). the economy was dangerously close to a liquidity trap.

answered by: anonymous
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