According to the IS-LM model, in a liquidity trap an increase in money supply causes the interest rate to:
A)increase.
B)decline.
C)remain constant.
D)fluctuate.

Question

Quizplus · Accepted Answer

In a liquidity trap, the demand for money becomes extremely elastic, as interest rates approach zero. Therefore, an increase in money supply does not have any significant impact on interest rates, and they remain constant. This is because individuals and businesses prefer to hold onto their money rather than invest it, and the excess money supply does not lead to an increase in spending or investment, leading to a situation of equilibrium with no change in interest rates.

According to the IS-LM Model, in a Liquidity Trap an Increase