The liquidity trap is NOT associated with:
A) a large reduction in the demand for loanable funds.
B) the nominal interest rate falling to zero.
C) monetary policy becoming ineffective.
D) fiscal policy becoming ineffective.

Question

Quizplus · Accepted Answer

The liquidity trap is primarily associated with a situation where monetary policy becomes ineffective due to nominal interest rates falling to zero and a large reduction in the demand for loanable funds, leading to a situation where additional money supply injections by the central bank do not result in a corresponding increase in aggregate demand. Fiscal policy, on the other hand, may still be effective in stimulating aggregate demand in a liquidity trap by increasing government spending or cutting taxes. Therefore, option D is not associated with the liquidity trap.

The Liquidity Trap Is NOT Associated With