The liquidity trap: A) Refers to the vertical portion of the money demand curve

Economics May 08, 2021

The liquidity trap: A) Refers to the vertical portion of the money demand curve. B) Refers to the possibility that interest rates may not respond to changes in the money supply. C) Implies that people are willing to hold very limited amounts of money at low interest rates. D) All of the above.

Expert Solution

Answer

B )

Explanation

According to the liquidity preference theory at very low interest rate, people prefer to hold money in the form of cash rather than keeping in the bank or in bond. This is because the opportunity cost of holding money is lower at low interest rate. It is a situation where individuals are prepared to hold whatever amount of money supplied at a given interest rate.

So, The liquidity trap refers to the possibility that interest may not respond to changes in the money supply.

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