When the economy is in the liquidity trap, which of the following can provide a boost to consumption and investment?
A) People expect higher interest rates.
B) People expect a higher exchange rate.
C) People expect higher inflation.
D) People expect higher unemployment benefits.
E) People expect higher taxes.

Question

Quizplus · Accepted Answer

In the liquidity trap, interest rates are already at or near zero and therefore cannot be lowered further to stimulate consumption and investment. Expectations of a higher exchange rate, higher unemployment benefits, and higher taxes are unlikely to provide a boost to consumption and investment. However, expectations of higher inflation can encourage spending and investment as people try to avoid the anticipated rise in prices.

When the Economy Is in the Liquidity Trap, Which of the Following