If we are in a horizontal region of the money demand curve, expansionary monetary policy has __________ effect on output and expansionary fiscal policy has __________ effect on output.

Question

Quizplus · Accepted Answer

In a horizontal region of the money demand curve, the economy is in a liquidity trap, meaning interest rates are so low that monetary policy (changing the money supply) is ineffective at stimulating demand, hence "no" effect on output from expansionary monetary policy. However, expansionary fiscal policy (increasing government spending or cutting taxes) directly increases demand, leading to a "strong" effect on output.

If We Are in a Horizontal Region of the Money