If an economy is in a liquidity trap, then the nominal interest rate is ________ and the only effective policy that can be used to stimulate the economy is ________.
A) zero or negative; expansionary fiscal policy
B) zero or negative; expansionary monetary policy
C) high and rising; contractionary monetary policy
D) high and rising; expansionary monetary policy
E) high and rising; expansionary fiscal policy

Question

Quizplus · Accepted Answer

In a liquidity trap, the nominal interest rate is at or near zero, making conventional monetary policy ineffective. Expansionary fiscal policy, such as increased government spending or tax cuts, becomes the primary tool to stimulate the economy.

If an Economy Is in a Liquidity Trap, Then the Nominal