A contractionary monetary policy is least effective in influencing output when:

CA Foundation · Business Economics · MTP · September 2026
A contractionary monetary policy is least effective in influencing output when:
(A) A. interest elasticity of investment is high
(B) B. the economy operates under a liquidity trap
(C) C. exchange rates are flexible
(D) D. asset prices respond strongly to interest rates

Suggested Answer and Working Notes:

Correct Answer: Option (B)

B. the economy operates under a liquidity trap

Topics: Money Market

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