Liquidity Trap
5paisa Research Team
Last Updated: 12 Aug, 2024 03:03 PM IST

Content
- Introduction
- What is Liquidity Trap?
- Understanding a Liquidity Trap
- What Leads to a Liquidity Trap?
- Graphical Representation of the Liquidity Trap
- Implications of a Liquidity Trap
- Indicators of a Liquidity Trap
- How to Overcome a Liquidity Trap?
- Liquidity Trap Examples
- Conclusion
Introduction
A liquidity trap is an economic concept that describes a situation in which the central bank, such as the Federal Reserve, cannot stimulate economic growth through traditional monetary policy tools due to a lack of available funds. The liquidity trap definition states that when the interest rate is close to zero, and there is no other room for it to be lowered, this leads to a situation where people are unwilling or unable to borrow or invest money.
Thus, a liquidity trap can be defined as a state of economic stagnation caused by a failure of monetary policy. In such conditions, the monetary stimulus does not increase business or consumer spending and does not help boost the economy. As a result, a liquidity trap can lead to prolonged economic downturns.
How does liquidity Trap affect the economy
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