Which of the following will occur when an economy is faced with a liquidity trap situation?
A)A reduction in the price level will cause a rightward shift in the aggregate demand curve.
B)A reduction in the price level will cause a leftward shift in the aggregate demand curve.
C)The aggregate demand curve is now vertical.
D)The aggregate demand curve is now upward sloping.

Question

Quizplus · Accepted Answer

A liquidity trap occurs when interest rates are already extremely low, and consumers and investors do not respond to further reductions in interest rates. In this situation, monetary policy becomes ineffective, as further injections of money into the economy do not lead to increases in spending or investment. As a result, the aggregate demand curve becomes vertical, meaning that changes in the price level no longer affect the level of output or employment in the economy. Therefore, option C is the correct answer.

Which of the Following Will Occur When an Economy Is