If the economy is experiencing a liquidity trap, expansionary monetary policy wi

Question

If the economy is experiencing a liquidity trap, expansionary monetary policy will:

Question 16 options:

increase interest rates and expand aggregate demand.

lower the interest rates and expand aggregate demand.

lower the interest rates and decrease aggregate demand.

no longer lower the interest rates further, and aggregate demand will not change.

increase interest rates and expand aggregate demand.

lower the interest rates and expand aggregate demand.

lower the interest rates and decrease aggregate demand.

no longer lower the interest rates further, and aggregate demand will not change.

Explanation / Answer

Liquidity trap refers to a situation in which interest rates are already at very low level and further stimulation through expansionary monetary policy is ineffective.

In other words, if economy is having liquidity trap then in that case expansionary monetary policy would be quite ineffective in further lowering the interest rate and thus there will be no impact on aggregate demand of the expansionary monetary policy.

Thus,

If the economy is experiencing a liquidity trap, expansionary monetary policy will no longer lower the interest rates further, and aggregate demand will not change.

Hence, the correct answer is the option (4).

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.