Question

Suppose the money market is in the liquidity trap and that the economy is experiencing a recessionary gap. A Keynesian economist would most likely advocate

a. contractionary fiscal policy.
b. expansionary fiscal policy.
c. contractionary monetary policy.
d. expansionary monetary policy.

Answer 1

The correct answer is expansionary fiscal policy. In a recessionary gap, an expansionary fiscal policy involves either tax cuts or direct increases in government spending to stimulate consumption and investment, which can help boost the economy and close the gap. Therefore, the correct option is B.

Step-by-step explanation:

The correct answer is b. expansionary fiscal policy. In a recessionary gap, the economy is operating below its potential GDP, resulting in high unemployment and low aggregate demand.

An expansionary fiscal policy involves either tax cuts or direct increases in government spending to stimulate consumption and investment, which can shift the aggregate demand curve to the right. This can help boost the economy and close the recessionary gap.