The concept of 'Liquidity Trap' is most relevant when:
A. Interest rates are very high
B. The economy is at full employment with high inflation
C. Money demand is interest-inelastic
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.
Explanation:
Classical dichotomy refers to the separation of real and nominal variables, with money being neutral in the long run and affecting only the price level, not real output or employment.
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