When the economy is in a liquidity trap,which of the following is not correct?
A)A reduction in the interest rate can be used to increase output.
B)Fiscal policy is more important.
C)Interest rate is zero.
D)Large increases in spending and cuts in taxes were not enough to avoid the recession.

Question

Quizplus · Accepted Answer

In a liquidity trap, even if the central bank reduces the interest rate to zero, it may not stimulate borrowing and investment, as people prefer to hold onto cash rather than investing in assets. Therefore, A is not correct. On the other hand, B and D are correct, as fiscal policy becomes more important, and conventional monetary policy becomes ineffective. C is also correct, as the interest rate is near zero in a liquidity trap.

When the Economy Is in a Liquidity Trap,which of the Following