An increase in government spending will cause which of the following when a liquidity trap situation exists?
A) The interest rate will decrease.
B) Output will increase.
C) Output will not change.
D) Output will decrease.
E) The interest rate will increase.

Question

Quizplus · Accepted Answer

In a liquidity trap situation, cutting interest rates may not stimulate investment, causing an increase in government spending the only tool left for policymakers to boost output. Hence, an increase in government spending will cause an increase in output.

An Increase in Government Spending Will Cause Which of the Following