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INSTRUCTIONS: DEFINE THE FOLLOWING TERMS AND CONCEPTS IN A CLEAR, CONCISE, AND EXPLICIT WAY. DEMONSTRATE THE...

INSTRUCTIONS: DEFINE THE FOLLOWING TERMS AND CONCEPTS IN A CLEAR, CONCISE, AND EXPLICIT WAY. DEMONSTRATE THE RELATIONS BETWEEN THEM!

High-powered money & liquidity trap;

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Answer #1

The monetary base is known as the High powered money and it is the sum of currency and reserves and other deposit with the Federal Reserve.

High powered money= Currency held by public + reserve+ other deposit with the Federal Reserve.

The liquidity trap can be explained as the situation in which existing interest rates are low and savings rates are high and it makes monetary policy ineffective. In this situation, people do not hold bonds and keep their funds in savings, because they think that the interest rates will soon rise.

So when the liquidity trap situation arises, then the currency held by the public increases, so the high powered money also increases because currency held by the public is part of the high powered money.

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