The liquidity trap refers to the situation where: Question 17 options: 1) the Fed adds excess reserves to the banking system, but it has minimal positive effect on lending, investment, or aggregate demand. 2) excessive consumer debt limits the growth in consumer spending necessary to bring the economy out of recession. 3) the public debt is so large that federal borrowing drives up interest rates and discourages private sector spending. 4) a financial crisis causes a run on banks and the elimination of billions in excess reserves.