According to the New Keynesian Model, in a Liquidity Trap

question 16

Multiple Choice

According to the New Keynesian model, in a liquidity trap,

• A) fiscal policy is more effective than monetary policy.
• B) fiscal and monetary policy are equally effective.
• C) fiscal policy has little role.
• D) monetary policy is more effective than fiscal policy.
• E) neither monetary or fiscal policy is effective.

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Definitions:

Opportunity Cost

When deciding, the toll of not considering the next most beneficial alternative.

Bracelets

Jewelry items worn around the wrist for decoration, often made of metal, beads, or other materials.

Opportunity Cost

Opportunity cost is the value of the next best alternative foregone as a result of making a decision, representing the benefits an individual, investor, or business misses out on when choosing one alternative over another.

Allocatively Efficient

Allocatively Efficient means an economic state where resources are allocated in a way that maximizes the overall benefit to society, with goods and services distributed according to consumer preferences.