Monetary policy will be ineffective if
A)The demand for money is very sensitive to changes in the interest rate,but the investment demand is not.
B)The demand for money and investment demand are both very sensitive to changes in the interest rate.
C)Interest rates are sensitive to the quantity of money supplied,and investment spending is sensitive to changes in the interest rate.
D)Investors have favorable expectations for future sales.

Question

Quizplus · Accepted Answer

If the demand for money is very sensitive to changes in the interest rate but the investment demand is not, monetary policy may not be effective in influencing aggregate demand because changes in interest rates may not affect investment spending significantly. This is known as a "liquidity trap" and is a situation where monetary policy becomes ineffective because interest rates are already very low and cannot be lowered further to stimulate spending. Option B does not accurately describe a liquidity trap as both demand for money and investment demand are sensitive to changes in interest rates. Option C describes a situation where monetary policy can be effective in influencing aggregate demand, as investment spending is sensitive to changes in interest rates. Option D is unrelated to the question.

Monetary Policy Will Be Ineffective If