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Expansionary Monetary Policy Effects
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How does the presence of a liquidity trap affect the effectiveness of expansionary monetary policy in reducing unemployment during an economic recession?

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A

It renders expansionary monetary policy largely ineffective in stimulating job creation.

B

It leads to an immediate increase in interest rates, boosting employment.

C

It allows for greater flexibility in monetary policy, enhancing job growth.

D

It encourages businesses to invest more, leading to a decrease in unemployment.

Understanding the Answer

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When interest rates are already very low and people keep saving instead of spending, cutting rates further does not change much. Other options are incorrect because The idea that cutting rates will immediately raise interest rates is wrong; People think a liquidity trap gives policymakers more leeway.

Key Concepts

Impact on Employment Levels
Liquidity Trap
Topic

Expansionary Monetary Policy Effects

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medium level question

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Definition
Definition

Expansionary monetary policy involves the central bank reducing interest rates to stimulate aggregate demand, leading to increased output and decreased unemployment. This policy aims to address cyclical unemployment and boost real income in the short run.

Topic Definition

Expansionary monetary policy involves the central bank reducing interest rates to stimulate aggregate demand, leading to increased output and decreased unemployment. This policy aims to address cyclical unemployment and boost real income in the short run.

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