Question

Question 10 1 pts In the last eight years, Federal Reserve Open Market operations have not been as effective in stimulating the economy as they have the past 50 years. The main reason is that interest rates have been near zero, so there is not much incentive to buy Treasury Bills. This dangerous situation is known as the Liquidity trap Velocity of money Production Possibilities Frontier Monetarist determinant

Answer 1

Ans. 10. a) Liquidity trap

A liquidity trap is a situation where monetary policy becomes ineffective because of low-interest rates to a certain level. When money supply increases people will desire to hold more in cash than invest in treasury bills or bonds which will give them lower returns because of lower interest rates. Since when the interest rate near to zero will have the same return on treasury bill or holding cash, Therefore, there are no incentives to buy treasury bills

Other options are not considered for the above situation because:

The velocity of money means that a number of times currency circulated in the economy for purchasing goods and services. Therefore, this is not related to the above situation.

The production possibility frontier shows the combination of the production possibilities of two goods in the economy when the resources and technology are given in a particular time period.

According to the monetarist determinant changes in the money supply has a direct effect on either output level or price level in the economy.