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:

Sensory Control Center

The part of the brain responsible for processing and integrating information from the five senses to direct an appropriate response, often associated with the thalamus.

Medulla

The inner region of an organ or tissue, or more specifically, the lower part of the brainstem which controls vital functions such as heart rate and breathing.

Cerebellum

A major structure of the hindbrain that is responsible for fine motor control, balance, coordination, and motor learning.

Thalamus

A brain structure that acts as a relay station, directing sensory and motor signals to the cerebral cortex, except for the sense of smell.