When a liquidity trap situation exists,the most appropriate policy to increase output would be
A)a central bank sale of bonds.
B)an increase in government spending.
C)a central bank purchase of bonds.
D)none of the above

Question

Quizplus · Accepted Answer

In a liquidity trap situation, the interest rates are already very low, and therefore, the monetary policy measures such as central bank sales or purchases of bonds would not be as effective in stimulating the economy. In such situations, the appropriate policy intervention would be fiscal policy measures, such as an increase in government spending, to boost demand and stimulate the economy. Therefore, option B is the most appropriate choice.

When a Liquidity Trap Situation Exists,the Most Appropriate Policy to Increase