In Keynes' concept of the liquidity trap,
A) monetary policy becomes more effective as interest rates fall below normal.
B) people wish to hold more bonds as interest rates fall below normal.
C) people wish to hold fewer bonds as interest rates fall below normal.
D) there is a need for more liquidity in the banking system.

Question

Quizplus · Accepted Answer

In Keynes' concept of the liquidity trap, as interest rates fall below a certain level, people prefer to hold onto cash rather than bonds because they expect the interest rates to rise again, which would decrease the value of bonds. This makes monetary policy less effective, as further lowering interest rates does not stimulate borrowing or investment.

In Keynes' Concept of the Liquidity Trap