Under conditions of a liquidity trap and interest-insensitive investment,Keynesians would be most likely to propose __________ policy to eliminate a recessionary gap.
A) expansionary fiscal
B) contractionary fiscal
C) expansionary monetary
D) contractionary monetary

Question

Quizplus · Accepted Answer

In a liquidity trap, interest rates are already low and monetary policy is ineffective. Additionally, in a situation where investment is not responsive to interest rates, increasing the money supply (expansionary monetary policy) will not stimulate the economy. Therefore, Keynesians would suggest an expansionary fiscal policy, which involves the government increasing spending or cutting taxes to inject demand into the economy and close the recessionary gap. This type of policy is more effective in a liquidity trap, where interest rates are already low, and investment is not responsive to changes in interest rates.

Under Conditions of a Liquidity Trap and Interest-Insensitive Investment,Keynesians Would