If the economy is in a liquidity trap, monetary policy is _____ and fiscal policy is _____.
A) effective; effective
B) ineffective; ineffective
C) effective; ineffective
D) ineffective; effective

Question

Quizplus · Accepted Answer

In a liquidity trap, interest rates are so low that monetary policy is ineffective in stimulating economic growth, as individuals and businesses are not easily incentivized to spend or invest despite the low rates. In this scenario, fiscal policy becomes the primary tool for policymakers to boost the economy by increasing government spending and/or cutting taxes. Therefore, fiscal policy is effective, while monetary policy is ineffective.

If the Economy Is in a Liquidity Trap, Monetary Policy