CA Foundation P4 · Chapter 8 · Question 4 of 15
In Keynesian theory, the 'liquidity trap' refers to a situation where:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) At a very low interest rate the demand for money becomes perfectly elastic, so increases in money supply do not lower the interest rate
Explanation
At a very low interest rate, everyone expects rates to rise (bond prices to fall), so people prefer to hold cash. The speculative demand curve becomes horizontal; additional money is simply held, and monetary policy becomes ineffective in reducing the interest rate.
More Money Market MCQs
- Q6According to the Cambridge cash-balance equation M = kPY, if k = 0.25 and nominal income PY = Rs. 8,000 crore, the demand for money is:
- Q7In the RBI's monetary aggregates, broad money (M3) is equal to:
- Q8The currency-deposit ratio is 0.2 and the reserve-deposit ratio is 0.1. If high-powered money is Rs. 500 crore, the money supply is:
- Q9Reserve money (high-powered money) consists of:
- Q10When the central bank purchases government securities in the open market, it: