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Which one of the following is true for the phenomenon of Liquidity Trap?

At the liquidity-trap floor, speculative money demand is perfectly elastic: the public absorbs extra money as cash without a further fall in interest. Buying bonds would…

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Which one of the following is true for the phenomenon of Liquidity Trap?

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Answer and explanation

Correct answer C

At the liquidity-trap floor, speculative money demand is perfectly elastic: the public absorbs extra money as cash without a further fall in interest. Buying bonds would instead put downward pressure on rates; a very high rate is the opposite situation, and a further rate decline contradicts the trap idealisation.

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