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)Occurs when people wish to hold more and more money as interest rates fall.

Question

Quizplus · Accepted Answer

The liquidity trap refers to the possibility that interest rates may not respond to changes in the money supply because people are willing to hold very limited amounts of money at low interest rates. Option A is incorrect because it refers to the shape of the money demand curve, not the liquidity trap. Option C is partially correct but does not fully capture the essence of the liquidity trap. Option D is incorrect because it describes the opposite of the liquidity trap, where people wish to hold more money as interest rates fall.

The Liquidity Trap