Question

The liquidity trap _____. rev: 06_20_2018 Multiple Choice makes expansionary monetary policy less effective makes contractionary monetary policy less effective makes expansionary fiscal policy less effective makes contractionary fiscal policy less effective

Answer 1

Answer:

Makes expansionary monetary policy less effective

Explanation:

A liquidity trap occurs when interest rates are already so low, that most of the public prefer to hold money as cash, instead of investing in bonds and other interest-bearing securities.

In a situation like this, expansionary monetary policy becomes less effective, because the central bank cannot boost the economy anymore by lowering interest rates (interest rates are lowered by increasing the money supply) because most of the public prefers to hold money as cash, and the interest rate is very low already.