Keynesian Liquidity Trap Flashcards
1
Q
When does a liquidity trap occur
A
When low interest rates and a high amount of cash balances in the economy fail to stimulate AD
2
Q
Within the liquidity trap how is AD boosted
A
By the government borrowing more - either to spend or give to others via tax cuts
3
Q
What do Keynesians believe
A
That the size of the fiscal multiplier effect is higher for government spending than it is for tax cuts
4
Q
What happens when private sector demand for goods and services is persistently low
A
The government needs to find a compensating source of demand to rebalance the economy - and the solution comes from the government in the form of higher borrowing or less saving
