The Keynesian liquidity trap occurs when:

A Interest rates are very high

B Interest rates are so low that monetary policy becomes ineffective

C Inflation is very high

D GDP is growing rapidly

✓ Correct Answer: Option B

In a liquidity trap, rates are near zero, people hoard cash, and further monetary expansion has little effect.

💡 Why is B) the correct answer?

The correct answer to the question "The Keynesian liquidity trap occurs when:" is Option B: Interest rates are so low that monetary policy becomes ineffective.

The other options — A) Interest rates are very high, C) Inflation is very high, D) GDP is growing rapidly — are incorrect for this CFA Exam Prep question. As explained above: In a liquidity trap, rates are near zero, people hoard cash, and further monetary expansion has little effect.

📚 About This CFA Exam Prep Practice Question

This 3-level CFA Exam Prep question from the Economics topic is part of BrainForge Quiz's free exam preparation library. Each question includes the correct answer and a detailed explanation to help you understand the underlying concept, not just memorize the answer.

How to use this page: Read the question above, consider all four options (A through D), then check the highlighted correct answer and explanation. For active timed practice, start a free CFA Exam Prep practice test or use flashcards for spaced repetition review.

Practice CFA Exam Prep Quizzes → Browse All Questions Study Flashcards

The Keynesian liquidity trap occurs when:

✓ Correct Answer: Option B

📚 About This CFA Exam Prep Practice Question

Related CFA Exam Prep Questions