Suppose a Liquidity Trap Situation Exists

question 29

Multiple Choice

Suppose a liquidity trap situation exists.Which of the following is most likely to occur if taxes are cut?

• A)no change in output and no change in the interest rate
• B)an increase in output and an increase in the interest rate
• C)an increase in output and little change in the interest rate
• D)an increase in output and a reduction in the interest rate
• E) none of the above

---

Definitions:

Shares Outstanding

The total number of shares of a company that have been issued and are held by shareholders, including shares held by the public as well as restricted shares owned by the company’s insiders.

Unlevered Cost

The cost of financing a project or investment without any debt, reflecting the expenses incurred using only equity financing.

Weighted Average

A weighted average is a calculation that takes into account the varying degrees of importance of the numbers in a data set, providing a measure that reflects their contribution to the overall total.

Coupon

The interest rate stated on a bond when issued, which is typically paid at regular intervals until maturity.