Which of the following will occur when an economy is faced with a liquidity trap situation?
A)a reduction in the price level will cause a rightward shift in the aggregate demand curve
B)a reduction in the price level will cause a leftward shift in the aggregate demand curve
C)the aggregate demand curve is now vertical
D)the aggregate demand curve is now upward sloping

Question

Quizplus · Accepted Answer

In a liquidity trap situation, interest rates are already very low and cannot be lowered further to stimulate borrowing and investment. As a result, monetary policy becomes ineffective and the aggregate demand curve becomes vertical. This means that changes in the price level no longer have an impact on aggregate demand, as individuals and firms are more concerned with holding onto cash rather than spending or investing it.

Which of the Following Will Occur When an Economy Is