Question : In the situation of a liquidity trap, the speculative money demand function becomes ________.
Option 1: unitary elastic
Option 2: infinitely elastic
Option 3: inelastic
Option 4: zero
Correct Answer: infinitely elastic
Solution : The correct option is infinitely elastic .
The speculative demand for money is typically assumed to be infinite. In a liquidity trap, interest rates are very low (close to zero), and conventional monetary policy becomes ineffective because nominal interest rates cannot be reduced further to stimulate investment and spending.
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