14. What are the implications of a liquidity trap for the Federal Reserve? A liquidity trap is a situation in a severe (expansion, recession ) in which the central bank's injection of additional reserves into the banking system has ( little or no, too much excessive ) additional positive impact on lending, borrowing, investment, or aggregate demand. The implication is that the Fed can create excess reserves, (and it can, but it cannot ) guarantee that banks will want to make additional loans. Households and businesses may not want to borrow, and the money received from the Fed's purchase of securities may be used to pay off existing loans rather than to increase their purchases of goods and services.
14. What are the implications of a liquidity trap for the Federal Reserve? A liquidity trap is a situation in a severe (expansion, recession ) in which the central bank's injection of additional reserves into the banking system has ( little or no, too much excessive ) additional positive impact on lending, borrowing, investment, or aggregate demand. The implication is that the Fed can create excess reserves, (and it can, but it cannot ) guarantee that banks will want to make additional loans. Households and businesses may not want to borrow, and the money received from the Fed's purchase of securities may be used to pay off existing loans rather than to increase their purchases of goods and services.
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter21: The Monetary System
Section: Chapter Questions
Problem 9PA
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![14. What are the implications of a liquidity trap for the Federal Reserve?
A liquidity trap is a situation in a severe ( expansion, recession ) in which the central bank's injection of
additional reserves into the banking system has ( little or no, too much excessive ) additional positive
impact on lending, borrowing, investment, or aggregate demand. The implication is that the Fed can
create excess reserves, (and it can, but it cannot ) guarantee that banks will want to make additional
loans. Households and businesses may not want to borrow, and the money received from the Fed's
purchase of securities may be used to pay off existing loans rather than to increase their purchases of
goods and services.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe0dca215-93ee-488d-9b4c-cdadeecd5be1%2F3c445169-5539-416e-827e-7fa9dc30717e%2Fd7fq4rn_processed.png&w=3840&q=75)
Transcribed Image Text:14. What are the implications of a liquidity trap for the Federal Reserve?
A liquidity trap is a situation in a severe ( expansion, recession ) in which the central bank's injection of
additional reserves into the banking system has ( little or no, too much excessive ) additional positive
impact on lending, borrowing, investment, or aggregate demand. The implication is that the Fed can
create excess reserves, (and it can, but it cannot ) guarantee that banks will want to make additional
loans. Households and businesses may not want to borrow, and the money received from the Fed's
purchase of securities may be used to pay off existing loans rather than to increase their purchases of
goods and services.
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