A liquidity trap is a situation in which A using expansionar

A liquidity trap is a situation in which:

A. using expansionary monetary policy is not effective, because the real interest rate is negative.

B. aggregate demand falls, because consumers do not have enough liquidity to consume.

C. using expansionary monetary policy is not effective because, the nominal interest rate is almost zero.

D. lenders are trapped by large loans with declining rates of return.

E. using expansionary fiscal policy is not effective because, the budget is in a deficit.

Solution

Ans is C

Liquidity trap is a situation where interest rate is too low and saving rates are high.consumers choose to avoid bonds and keep their funds in savings, because of the prevailing belief that interest rates will soon rise. Because bonds have an inverse relationship to interest rates, many consumers do not want to hold an asset with a price that is expected to decline.Thus monetary lolicy is ineffective.