Which of the following situations best explains why speculative demand for money becomes perfectly elastic in a liquidity trap?

CA Foundation · Business Economics · MTP · January 2026
Which of the following situations best explains why speculative demand for money becomes perfectly elastic in a liquidity trap?
(A) A. Transaction demand becomes interest elastic
(B) B. Bond prices become constant
(C) C. Expected capital losses on bonds dominate interest earnings
(D) D. Income elasticity of money demand becomes zero

Suggested Answer and Working Notes:

Correct Answer: Option (C)

C. Expected capital losses on bonds dominate interest earnings

Topics: Money Market

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