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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


Team Careers360 20th Jan, 2024
Answer (1)
Team Careers360 24th Jan, 2024

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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