Question

In the IS-LM model, a 'Liquidity Trap' occurs when the LM curve is horizontal. In this situation, which policy is completely ineffective in changing the level of income?

Q: Answer-In the IS-LM model, a 'Liquidity Trap' occurs when the LM curve is horizontal. In this situation, wh...

Explanation In a liquidity trap, the interest rate is at its lower bound any increase in the money supply is simply held by the public as idle balances, failing to lower interest rates further or stimulate investment.

A Expansionary Fiscal Policy

B Contractionary Fiscal Policy

C Expansionary Monetary Policy

D Exchange Rate Devaluation

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In the IS-LM model, a 'Liquidity Trap' occurs when the LM curve is horizontal. In this situation, which policy is completely ineffective in changing the level of income?

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