Question

1. A liquidity trap exists when the demand for money is ___________ to interest rates. a....

1. A liquidity trap exists when the demand for money is ___________

to interest rates.

a. Ultra-sensitive or b. Not sensitive

2. When nominal interest rates hit zero, which of the following is not true:

A. nonconventional monetary policy must be used instead.

B. a liquidity trap has occurred.

C. the demand for money is completely flat.

D. conventional monetary policy can be used.

3. What case of interest sensitivity of the demand of money is supported by the data?

A. There is ultra sensitivity of the demand for money to interest rates.

B. Neither extreme case is supported by the data.

C. Interest rates do not affect the demand of money.

Please answer - thanks

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Homework Answers

Answer #1

a) A liquidity trap exists when the demand for money is "ultra-sensitive" to interest rates.The money demand is falt here suggesting a highly elastic money demand i.e. ultra sensitive.

b) "D"

When the interest rates hit Zero conventional monetary policy can't be used. The conventional monetary policy includes an increase or decrease in the interest rates if the rate is already zero we can't decrease it further and the conventional policies fail.

c) "B"

Neither extreme case is supported by data.

  

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