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and the only effective If an economy is in a liquidity trap, then the nominal interest rate is _ policy that can be used to s

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Answer: Zero or negative; expansionary fiscal policy.

If an economy is in a liquidity trap, then the nominal interest rate is Zero or negative and the only effective policy that can be used to stimulate the economy is expansionary fiscal policy.

The liquidity trap or liquidity crisis is a situation in an economy when the interest rate in the economy is zero or negative. At this situation, the people doesn't like to invest money in interest bearing assets like bonds; instead they like to hold money whatever they have or save it. It reduces aggregate demand, investment, and production in the economy, which in turn causes slower or negative economic growth. When an economy is caught in liquidity trap,the only effective policy that can be used to stimulate the economy is expansionary fiscal policy. The expansionary fiscal policy stimulates the economy by increasing aggregate demand and thus economic growth.

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