Question

.which of the following case the LM curve will be Horizontal ?

a)Liquidity trap b)Classical case c)AD demand curve goes down d) crowding case​

Answer 1

Answer:

I think d) crowding case

Answer 2

Option a is the correct answer.

LM curve is horizontal in the case of Liquidity trap.

1. The horizontal curve of LM is also known as the keynesian range.
2. In this range the liquidity preference curve is known as liquidity trap because liquidity preference curve is at a minimum interest rate and any increase in money supply will not affect the interest rate that is why there will be no increase in the investment. Therefore it will be horizontal.
3. Liquidity trap leads to:

• high savings
• low interest rate
• ineffective monetary policy.