The liquidity trap occurs when the demand for money ?
Correct answer: A. Is perfectly interest elastic
- A. Is perfectly interest elastic
- B. Is perfectly interest inelastic
- C. Means that an increase in money supply leads to a fall in the interest rate
- D. Means that an increases in the money supply leads to an increases in the interest rate
Explanation
In a liquidity trap, people are willing to hold any additional money at the prevailing very low interest rate, making money demand perfectly interest-elastic. Extra money therefore does not reduce the interest rate further.
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