If there is a liquidity trap in the New Keynesian model then

Question

Quizplus · Accepted Answer

In a liquidity trap scenario, the nominal interest rate is at its lower bound, which means that traditional monetary policy measures such as reducing interest rates may not be effective in stimulating the economy. In this situation, fiscal policy (such as increased government spending) may be more effective in boosting demand and increasing economic output. Prices may still remain sticky due to factors such as menu costs, but the key issue is the inability of conventional monetary policy to stimulate the economy.

If There Is a Liquidity Trap in the New Keynesian