A liquidity trap makes expansionary monetary policy less effective because
Correct answer: B. People are willing to hold additional money at a very low interest rate
- A. Banks are legally unable to create deposits
- B. People are willing to hold additional money at a very low interest rate
- C. The government automatically raises taxes during a recession
- D. Exports fall whenever the money supply increases
Explanation
In a liquidity trap, interest rates are very low and people prefer holding liquid money rather than bonds. Consequently, increasing the money supply may have little effect on interest rates, investment, or aggregate demand.
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The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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