Question

In a severe recession, the Fed's implementation of an easy money policy may have little to...

In a severe recession, the Fed's implementation of an easy money policy may have little to no impact on lending, borrowing, investment or aggregate demand. This describes the:

Multiple Choice

  • inflexibility of monetary policy tools.

  • lags that hinder monetary policy.

  • liquidity trap.

  • monetary political business cycle.

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Answer #1

In a severe recession, the Fed's implementation of an easy money policy may have little to no impact on lending, borrowing, investment or aggregate demand. This describes the liquidity trap.

In case of liquidty trap, increase in money supply (i.e., easy money policy) does not decrease the interest rate. It happens when there is already very low interest rate. Hence, this policy does not have any impact on lending, borrowing, investment or aggregate demand.

Answer: Option (C)

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