During a Liquidity Trap

question 8

Multiple Choice

During a liquidity trap:

• A) monetary and fiscal policies are equally effective.
• B) changes in taxes do not impact aggregate demand.
• C) changes in government spending do not impact aggregate demand.
• D) monetary policy is less effective.

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Definitions:

Breakeven Volume

The number of units that must be sold at a given price to cover all costs, with no profit or loss.

Variable Costs

Costs that change in proportion to the level of output or activity in a business.

Fixed Costs

Rent, salaries, and insurance charges are examples of expenses that are unaffected by changes in production or sales volumes.

EBIT-EPS Analysis

A tool used to study the effect of financing alternatives on a company's earnings per share and taxes.