The concept of 'Liquidity Trap' is most relevant when:
A. Money demand is interest-inelastic
B. Interest rates are very high
C. The economy is at full employment with high inflation
D. Nominal interest rates are close to zero and money demand is perfectly elastic
Answer: Option D
Solution (By JKSSB Mock Tests)
In a liquidity trap, the nominal interest rate is at or near zero and further increases in the money supply are absorbed entirely as idle balances, rendering conventional monetary policy ineffective.
No comments yet. Be the first to start the discussion!