In a liquidity trap:
A) using expansionary monetary policy is not effective because the real interest rate is negative.
B) aggregate demand falls because consumers do not have enough liquidity to consume.
C) using expansionary monetary policy is not effective because the nominal interest rate is irreducible.
D) lenders are trapped by large loans with declining rates of return.

Question

Quizplus · Accepted Answer

In a liquidity trap, the nominal interest rate is already at or near zero, so further expansionary monetary policy is not effective. This is because the nominal interest rate cannot be reduced further, even though there is excess supply of money in the economy. Therefore, choice C is the correct answer.

In a Liquidity Trap