Final answer:
In a liquidity trap, expansionary monetary policy often has little impact on the economy since people prefer to hold cash over borrowing or investing, making central bank efforts to boost economic activity through such policy less effective.
Step-by-step explanation:
When the economy is caught in a liquidity trap, expansionary monetary policy will likely have little impact on the economy. A liquidity trap occurs when interest rates are low, and savings rates are high, making consumers and businesses less responsive to further decreases in interest rates. Even if the central bank increases the money supply, the additional liquidity does not translate to greater lending or spending, and the aggregate demand may not increase significantly.
In such a scenario, people prefer to hold onto cash or safe assets rather than borrowing or investing, which means that the central bank's efforts to stimulate the economy through expansionary monetary policy become ineffective. This explains why, during a liquidity trap, expansionary monetary policy might not lead to inflation, a significant contraction, or a significant expansion in economic activity, but instead, it might simply result in minimal effects on the overall economy.