In the Keynesian transmission mechanism,if the money market is in the liquidity trap,an increase in the money supply will
A) cause total expenditures and aggregate demand to increase.
B) cause total expenditures and aggregate demand to decrease.
C) have no impact on total expenditures and aggregate demand.
D) cause total expenditures to increase and aggregate demand to decrease.
E) cause total expenditures to decrease and aggregate demand to increase.

Question

Quizplus · Accepted Answer

In the liquidity trap, interest rates are very low and further monetary expansion will have no effect on the interest rate or investment. Thus, an increase in the money supply will have no impact on total expenditures and aggregate demand. This is because people will choose to hold on to the extra cash instead of spending it or investing it.

In the Keynesian Transmission Mechanism,if the Money Market Is in the Liquidity