When the money market is at an equilibrium in the liquidity trap,

Question

Quizplus · Accepted Answer

In a liquidity trap, interest rates are already at or near zero, and the demand for money is very sensitive to interest rates. Therefore, an increase in the money supply does not lead to a decrease in interest rates, but rather a corresponding increase in the demand for money, which offsets the effect of the increase in the money supply. This is why the money market is at an equilibrium, and interest rates remain unchanged despite an increase in the money supply.

When the Money Market Is at an Equilibrium in the Liquidity