The liquidity trap Refers to the vertical portion of the money demand curve Refe

Question

The liquidity trap Refers to the vertical portion of the money demand curve Refers to the possibility that interest may not respond to changes in the money supply Implies that people are willing to hold very limited amounts of money at low interest rates Occurs when people wish to hold more and more money as interest rates fall The liquidity trap Refers to the vertical portion of the money demand curve Refers to the possibility that interest may not respond to changes in the money supply Implies that people are willing to hold very limited amounts of money at low interest rates Occurs when people wish to hold more and more money as interest rates fall Refers to the vertical portion of the money demand curve Refers to the possibility that interest may not respond to changes in the money supply Implies that people are willing to hold very limited amounts of money at low interest rates Occurs when people wish to hold more and more money as interest rates fall

Explanation / Answer

Answer is Refers to the possibility that interest may not respond to changes in the money supply

Liquidity trap is a situation where individuals are prepared to hold whatever amount of money supplied at a given interest rate. This imply that LM curve is horizontal and change in quantity of money will not shift LM curve further to the right. In that case monetary policy has no effect on either interest rate or income.

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