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Q: Which of the following statements islare correct regarding liquidity trap? i. It is the point where speculative demand for money is infinitely inelastic and the liquidity preference curve becames perfectly elastic. ii. It is the point where speculative demand for money is infinitely elastic and the liquidity preference curve becomes perfectly inelastic. iii. It is the point where speculative demand for money is infinitely elastic and the liquidity preference curve becomes perfectly elastic. iv. It is the point where speculative demand for money and the liquidity preference curves are not related.
  • A. Only statement iii is correct
  • B. Only statement i is correct
  • C. Only statement i and ii are correct
  • D. Only statement iv is correct
Correct Answer: Option A - Regarding liquidity trap statement iii is correct because a liquidity trap is a situation where monetary policy becomes ineffective due to the zero lower bound on interest rates. It is the point where speculative demand for money is infinitely elastic and the liquidity preference curve becomes perfectly elastic.
A. Regarding liquidity trap statement iii is correct because a liquidity trap is a situation where monetary policy becomes ineffective due to the zero lower bound on interest rates. It is the point where speculative demand for money is infinitely elastic and the liquidity preference curve becomes perfectly elastic.

Explanations:

Regarding liquidity trap statement iii is correct because a liquidity trap is a situation where monetary policy becomes ineffective due to the zero lower bound on interest rates. It is the point where speculative demand for money is infinitely elastic and the liquidity preference curve becomes perfectly elastic.