When an economy is in a deflationary spiral, and nominal interest rates are close to zero, it may be necessary:
A) for the Fed to print money.
B) for the Fed to buy financial securities.
C) to use fiscal stimulus.
D) All of these answers are correct.
E) None of these answers is correct.

Question

Quizplus · Accepted Answer

If an economy is experiencing a deflationary spiral and nominal interest rates are close to zero, it indicates that the economy is trapped in a liquidity trap. In such a scenario, the Fed may need to employ unconventional monetary policies such as quantitative easing (buying financial securities) or printing money to inject liquidity into the economy. Additionally, fiscal stimulus such as government spending or tax cuts may also be required to boost demand and revive the economy. Therefore, all the options mentioned are appropriate measures for the policymakers to consider in such a situation.

When an Economy Is in a Deflationary Spiral, and Nominal