A Liquidity Trap Occurs When

Multiple Choice

A liquidity trap occurs when

A) any additions to the monetary base are held as cash by people or reserves at banks.
B) the Fed increases the money supply, causing the expected inflation rate to rise more than the real interest rate declines, so that the nominal interest rate increases.
C) there are runs on banks that are solvent but illiquid.
D) the demand for loans increases in a country on the gold standard, so that the monetary supply is not able to increase and interest rates rise dramatically.