In the liquidity trap,monetary policy
A)has a large impact on interest rates.
B)has a small impact on interest rates.
C)has no impact on interest rates.
D)has a proportionate impact on interest rates.

Question

Quizplus · Accepted Answer

In a liquidity trap, interest rates are already very low and the demand for money is very high. In such a situation, monetary policy becomes largely ineffective in impacting interest rates as there is little room for further reduction in interest rates through open market operations or changes in reserve requirements. Hence, monetary policy has no impact on interest rates in a liquidity trap.

In the Liquidity Trap,monetary Policy