Correct Answer: Infinitely elastic
Subject: economics
Explanation: • <b>Key Fact</b> A Liquidity Trap is a situation where prevailing market interest rates are so low that the speculative demand for money becomes infinitely elastic. • <b>Supporting Detail</b> In this scenario, the liquidity preference curve becomes perfectly elastic. • <b>Related Concept</b> An increase in the money supply by the central bank has no effect on interest rates because people prefer holding cash. • <b>Why wrong options are wrong</b> It is not inelastic or zero, people hoard all the extra cash supplied. • <b>Exam Trick</b> Rates are so low that they are "trapped" at the bottom; everyone wants cash (high elasticity). • <b>Additional Info</b> Most people will expect the interest rate to rise in the future and thus prefer not to hold bonds.
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