Paul Krugman, a recipient of the Bank of Sweden Nobel Memorial Prize in Economics, famously depicted the economic situation in Japan in the 1990s as a “liquidity trap”, whereby interest rates were so low that Japanese consumers were willing to hold additional liquidity without  changing their interest rates expectations. What happens to the money demand curve in such a situation? Why does monetary policy fail to lower interest rates? Explain with the help of a graph.

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Interest rate, r 0 Ms Money, M Md