When the economy is in a liquidity trap, the adjustment process without active policy:
A) will succeed because interest rates are already low.
B) will require an increase in the money supply to get the economy back to full employment.
C) may fail because interest rates cannot fall any further.
D) becomes more effective with lower interest rates.

Question

Quizplus · Accepted Answer

In a liquidity trap, interest rates are already at or near zero, and thus cannot be lowered further to stimulate borrowing and spending. Without active policy such as increasing the money supply or government spending, the economy may continue to suffer from inadequate demand and stagnation. Therefore, choice C is the best answer as it acknowledges the limitations of the adjustment process without active policy in a liquidity trap.

When the Economy Is in a Liquidity Trap, the Adjustment