When the money market is in equilibrium in the liquidity trap,
A)An increase in the money supply does not affect interest rates.
B)The demand for money is perfectly insensitive to interest rates.
C)Investment spending falls to zero.

Question

Quizplus · Accepted Answer

In a liquidity trap, interest rates are already at or near zero and the demand for money is highly sensitive to changes in interest rates. Therefore, an increase in the money supply will not lead to a decrease in interest rates and will have no effect on investment spending.

When the Money Market Is in Equilibrium in the Liquidity