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

Question

Quizplus · Accepted Answer

In a liquidity trap, traditional monetary policy tools become ineffective because interest rates are already very low or near zero, making it hard to stimulate investment and spending through monetary policy. However, a tax cut can increase disposable income, leading to higher consumption and investment, which in turn can increase output even when monetary policy is ineffective.

A Tax Cut Will Cause Which of the Following When