Concerns of Monetary Policy Effectiveness during Recession

Very Hard Macroeconomics Business Cycles

The economy of a hypothetical country, EconLand, is currently experiencing a recession, characterized by two consecutive quarters of negative GDP growth. The central bank has responded by cutting interest rates significantly to stimulate borrowing and investment. Additionally, the government has initiated a fiscal stimulus package aimed at increasing public spending. However, there are concerns among economists that the measures taken may not effectively counteract the prolonged nature of the recession.

Which of the following statements best describes the main theoretical concern regarding this situation in relation to business cycles?

The liquidity trap may prevent monetary policy from being effective in stimulating economic growth.

The fiscal stimulus package will inevitably lead to increased inflation regardless of economic performance.

Both monetary and fiscal policies will result in a crowding-out effect that negates their effectiveness.

Hint

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