What is a liquidity trap?

CA Foundation · Business Economics · MTP · January 2026
What is a liquidity trap?
(A) A. Money becomes illiquid due to inflation
(B) B. Money supply becomes ineffective at zero interest rate
(C) C. Interest rate becomes infinite
(D) D. Bonds have negative yield

Suggested Answer and Working Notes:

Correct Answer: Option (B)

B. Money supply becomes ineffective at zero interest rate

Topics: Money Market

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