Question

19. We would expect that the level of income that would equate total demand for and supply of money would be: (a) roughly at the level of the Fed’s interest rate target; (b) lower the lower the interest rates; (c) equal to the level that would equate realized investment with realized savings; (d) higher the lower the interest rate (or lower the higher the interest rate).

20. For several decades, Japan was in a “liquidity trap.” Consequently: (a) further monetary stimulus had little to no impact on GDP; (b) interest rates became stuck at very high levels; (c) fiscal stimulus that pushed the LM curve outward could not bring interest rates up: (d) there was a systemic insufficiency of liquidity in Japanese financial markets.

Answer 1

Answer 1 - Option C

Equal to the level that would equate realised investment with realised savings

If AD = AS , then S = I is also the economic equilibrium. Hence Option C will be correct

Answer 2 - Option A

Further monetary stimulus has little or no impact upon GDP.

The fall in interest rates would not lead to economic growth in case of liquidity trap. For the fiscal policy , the problem occurs in case of crowding out and not liquidity trap. Hence Option A will be correct.