The liquidity trap exists because the lower portion of the money demand curve is horizontal.
Along the horizontal portion of the money demand curve,an increase in money supply does not cause interest rates to fall any further.

Question

Quizplus · Accepted Answer

This is true. In a liquidity trap, interest rates are already at or close to zero, so increasing the money supply will not have any effect on interest rates. The demand for money becomes perfectly elastic at this point, so any increase in the money supply will simply be held as excess reserves rather than being loaned out.

The Liquidity Trap Exists Because the Lower Portion of the Money