According to the IS-LM model, if an economy is in a 'Liquidity Trap', expansionary monetary policy (increasing the money supply) will be highly effective in lowering interest rates and boosting aggregate output.

In a liquidity trap, interest rates are already at or near zero, and the public prefers to hoard cash rather than buy bonds, expecting rates to rise. Consequently, the LM curve becomes perfectly horizontal, meaning any increase in the money supply will be entirely absorbed by speculative balances, failing to lower interest rates further or stimulate investment and output.