When an economy is experiencing a "liquidity trap," monetary policy to bring the economy back to full employment
A) has too large of an effect.
B) changes wages, but prices remain unchanged.
C) changes prices but not wages.
D) no longer works.

Question

Quizplus · Accepted Answer

In a liquidity trap, interest rates are already at or near zero, and the demand for money becomes relatively insensitive to changes in interest rates. This means that expansionary monetary policy, such as lowering interest rates, will not be effective in stimulating economic activity and bringing the economy back to full employment. Therefore, the correct answer is D - no longer works.

When an Economy Is Experiencing a "Liquidity Trap," Monetary Policy