To avoid falling into a liquidity trap, most central banks:
A) seek a positive but small inflation rate rather than zero inflation.
B) target inflation rather than the money supply.
C) conduct open-market operations to change the money supply instead of changing the discount rate.
D) aim at a target of zero inflation so that inflation expectations are zero too.

Question

Quizplus · Accepted Answer

Seeking a positive but small inflation rate rather than zero inflation allows central banks to have some flexibility to adjust interest rates and stimulate demand in the event of a liquidity trap. If inflation is already at zero or close to zero, there is little room for further interest rate cuts to stimulate demand. Additionally, a small level of inflation can also help to prevent deflation, which can exacerbate a liquidity trap.

To Avoid Falling into a Liquidity Trap, Most Central Banks