The existence of a liquidity trap implies that a(n):
A) increase in the money supply will not lower interest rates.
B) decrease in the money supply will not lower interest rates.
C) decrease in the interest rate will be matched by a corresponding decrease in investment.
D) increase in the money supply leads to inflation.

Question

Quizplus · Accepted Answer

In a liquidity trap, interest rates are already so low that increasing the money supply does not further lower them, as people prefer to hold cash rather than invest in bonds with negligible returns.

The Existence of a Liquidity Trap Implies That A(n)