According to the New Keynesian model, in a liquidity trap
A)neither monetary or fiscal policy is effective.
B)monetary policy is more effective than fiscal policy.
C)fiscal policy is more effective than monetary policy.
D)fiscal and monetary policy are equally effective.
E)fiscal policy has little role.

Question

Quizplus · Accepted Answer

In a liquidity trap, interest rates are so low that monetary policy (e.g., lowering interest rates further) becomes ineffective at stimulating the economy. Fiscal policy (e.g., government spending and tax cuts), however, can still stimulate demand directly, making it more effective than monetary policy in such situations according to the New Keynesian model.

According to the New Keynesian Model, in a Liquidity Trap