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Praxis II Middle School Content Knowledge Test Prep

Category - Praxis Middle School Content Knowledge Practice Test

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What is a liquidity trap?
  1. When a company grows slowly because it focuses too much on liquidity
  2. When apparent assets actually are a drain on the company, creating a cash flow problem
  3. When there is not enough liquidity in a system, creating instability
  4. When people with cash won’t invest because they expect prices to fall
Explanation
Answer: D - A liquidity trap is when people who have cash won’t invest because they expect prices to drop. These beliefs are often self-fulfilling because prices drop when no one is willing to buy. When there is a liquidity trap, injecting cash into the economy has no effect because people still do not want to invest.
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