Keynes's theory did not endorse the use of monetary policy during the Great Depression because:
A) at the time, the nominal interest rate was very close to zero.
B) during WWII, the convertibility of the pound sterling into gold was suspended.
C) under the gold standard, the zero bound on nominal interest rates did not exist.
D) monetary expansions were impossible under a gold standard.

Question

Quizplus · Accepted Answer

Keynes believed that during a severe recession or depression, the economy could become stuck in a situation of low aggregate demand and high unemployment, which he called a "liquidity trap". In this situation, traditional monetary policy tools such as lowering interest rates would be ineffective because the nominal interest rate would already be close to zero. Therefore, Keynes recommended using fiscal policy to stimulate demand instead.

Keynes's Theory Did Not Endorse the Use of Monetary Policy