A traditional liquidity trap is problematic for a New Keynesian policy maker because there is a

Question

Quizplus · Accepted Answer

In a traditional liquidity trap, monetary policy is ineffective because the interest rate is already at zero and cannot be lowered further to stimulate borrowing and investment. This creates a situation where there is a positive output gap (i.e. potential for higher production and employment) but the policy maker cannot use the interest rate to close it. This can be problematic for a New Keynesian policy maker who relies on interest rate adjustments to manage the economy. Option A, C, D, and E are incorrect because they do not accurately describe the situation in a liquidity trap.

A Traditional Liquidity Trap Is Problematic for a New Keynesian