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…
Choose your answer
Which one of the following is true for the phenomenon of Liquidity Trap?
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.
Practice for these exams
-
UGC NET Economics