According to the IS-LM model, in a liquidity trap an increase in taxation, T, causes the level of output, Y, to:
A)increase.
B)decline.
C)remain constant.
D)fluctuate.

Question

Quizplus · Accepted Answer

In a liquidity trap, the interest rate is already at zero and the LM curve is flat. An increase in taxation, T, reduces disposable income, which results in a decrease in consumption, leading to a decrease in aggregate demand. As a result, the equilibrium level of output, Y, declines.

According to the IS-LM Model, in a Liquidity Trap an Increase