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:

Hindsight Bias

The tendency to believe, after learning an outcome, that one would have foreseen it, also known as the "knew-it-all-along" effect.

Timing Bias

A form of cognitive bias where an individual's decisions or perceptions are influenced by the timing of information or events.

Base Rate Neglect

The tendency to ignore information about general principles in favor of very specific but vivid information.

Bonferroni Inequalities

Statistical safeguards used to reduce the chances of making incorrect inferences when multiple hypothesis tests are being performed simultaneously.