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.
D)There is no speculative demand for money.

Question

Quizplus · Accepted Answer

In the liquidity trap, interest rates are very low and close to zero, which means that the demand for money is already satisfied. Therefore, an increase in the money supply does not affect interest rates, as individuals and firms have no incentive to borrow more money even if it is available at a lower cost. This is because they do not have enough profitable investment opportunities or expectations of future inflation, and they do not want to increase their debt levels. As a result, the money market is in equilibrium, and the economy is stuck in a low-interest rate, low-growth, and low-inflation environment.

When the Money Market Is in Equilibrium in the Liquidity