If an Economy Is in a Liquidity Trap, Then the Nominal

question 20

Multiple Choice

If an economy is in a liquidity trap, then the nominal interest rate is ________ and the only effective policy that can be used to stimulate the economy is ________.

• A) zero or negative; expansionary fiscal policy
• B) zero or negative; expansionary monetary policy
• C) high and rising; contractionary monetary policy
• D) high and rising; expansionary monetary policy
• E) high and rising; expansionary fiscal policy

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Definitions:

Reward

A benefit, often a form of compensation, given for performing a desired behavior, encouraging repetition of that behavior.

Memory

A cognitive process involving the encoding, storage, and retrieval of information.

Pain

A distressing physical and emotional sensation linked with real or possible harm to body tissues.

Fear

A basic human emotion induced by a perceived threat, which causes a change in brain and body function.