Question 3. 25 Marks

a. What is a liquidity trap? Show how liquidity trap can be depicted (i.e. graphed) using the market for money model. Label the axes, mark the curves and all relevant points and explain. 5 marks

b.Discuss the effectiveness of monetary policy to get out of a liquidity trap in a recessionary situation. Use an appropriately labeled AE graph, show all relevant points and explain. 8 marks

c. Using carefully labeled AE graphs, show and explain, how an economy can get out of a liquidity trap via fiscal policy. Label the axes, mark the curves and all relevant points. Explain. [Don't forget to mention what are the fiscal policy tools being used]. 12 marks