An Economy in a Liquidity Trap Faces a Zero Lower

question 19

Essay

An economy in a liquidity trap faces a zero lower bound on short-term interest rates. Some believe that expansionary monetary policy would be ineffective in this situation. Others argue that there are alternative transmission mechanisms that allow policy to have some impact. Briefly describe at least four alternative transmission mechanisms for monetary policy.

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Definitions:

Equivalent Interest Rate

A rate that reflects the actual annual cost of a loan or the earnings on an investment, taking into account the effect of compounding.

False Consensus Effect

A psychological bias where individuals believe their own viewpoints, actions, and behaviors are more common in the general population than they actually are.

Actors

Individuals who perform in stage plays, movies, television shows, or other productions, portraying characters.

Observers

Individuals who watch or notice something without directly participating in the action.