When a liquidity trap situation exists, the most appropriate policy to increase output would be:
A) an increase in taxes.
B) a central bank sale of bonds.
C) a decrease in government spending.
D) an increase in government spending.
E) a central bank purchase of bonds.

Question

Quizplus · Accepted Answer

When a liquidity trap situation exists, the economy is in a situation where interest rates are already very low and monetary policy has limited effectiveness. Therefore, the most appropriate policy to increase output would be expansionary fiscal policy, which involves an increase in government spending. This can help stimulate demand in the economy and lead to increased output and employment.

When a Liquidity Trap Situation Exists, the Most Appropriate Policy