The interest elasticity for speculative money demand in a liquidity trap is _______.

The correct answer is Perfectly elastic.

Key Points

• In a liquidity trap, the demand for speculative money becomes infinitely responsive to changes in the interest rate.
• As interest rates approach zero, people prefer holding cash rather than bonds, leading to perfectly elastic demand for money.
• Any additional supply of money in this scenario is held as cash, with no effect on interest rates.
• This phenomenon means that changes in the money supply do not affect the interest rates or stimulate the economy.

Additional Information

• Liquidity Trap:
  • A situation where monetary policy becomes ineffective because the nominal interest rate is close to zero.
  • People prefer holding cash instead of investing in bonds or other securities.
• Interest Rate:
  • The amount charged by lenders to borrowers for the use of money, expressed as a percentage of the principal.
  • In a liquidity trap, the interest rate is at or near zero.
• Speculative Demand for Money:
  • The demand for money based on the anticipation of changes in interest rates.
  • In a liquidity trap, speculative demand becomes perfectly elastic.
• Monetary Policy:
  • The process by which a central bank manages money supply and interest rates to influence the economy.
  • In a liquidity trap, traditional monetary policy tools become less effective.