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and lead to a recovery in that market. The same holds for all durable goods and physical investments –as things break and fail to be replaced in the current recession, demand sort of builds up and should result in a burst of “pent up” demand at some point in the future when people either feel safe enough to make those investments or just need very badly to fix/replace all their durable goods. 6) Explain the concept of a liquidity trap. Graphically illustrate the effects of a liquidity trap for the shapes of the money demand curve and the LM curve and describe in words why the curves change, based on your explanation of the concept of a liquidity trap 7) Describe in words and graphically illustrate how the presence of a liquidity trap affects monetary policy using the IS-LM model. Specifically, show how an increase in the money supply affects macroeconomic equilibrium in the IS-LM model. Now show the effects of expansionary fiscal policy in the IS-LM model when there is a liquidity trap.