The phenomenon of hoarding money when the interest rate falls to low levels is an outcome of
A) the liquidity trap.
B) the transactions demand for money.
C) the precautionary demand for money.
D) deflation.

Question

Quizplus · Accepted Answer

The hoarding of money when interest rates fall to low levels is a symptom of the liquidity trap, a situation in which people prefer to hold on to their money rather than spending or investing it due to uncertainty and pessimism about the future economic conditions. In a liquidity trap, conventional monetary policy measures such as lowering interest rates become ineffective in stimulating economic growth and inflation.

The Phenomenon of Hoarding Money When the Interest Rate Falls