The Pigou effect might be ineffective in correcting a recession if
A)prices are falling.
B)people expect the implied deflation to continue.
C)there is a liquidity trap.
D)the government does not expand the money supply.

Question

Quizplus · Accepted Answer

The Pigou effect suggests that when prices fall, people will increase their consumption and therefore stimulate demand and economic activity. However, if people expect prices to continue falling (deflation), they may save their money instead of spending it, which would be ineffective in correcting a recession.

The Pigou Effect Might Be Ineffective in Correcting a Recession