Economics • Economic BasicsMedium
What is meant by 'Liquidity Trap' as propounded by John Maynard Keynes?
A. A situation where commercial banks refuse to lend money due to high default risks
B. A situation where nominal interest rates are very low and monetary policy becomes ineffective because people prefer holding cash✓ Correct Answer
C. A condition where foreign exchange reserves are completely depleted
D. A financial crisis triggered by sudden capital flight from emerging markets
💡 Solution & Explanation
A liquidity trap occurs when nominal interest rates are near zero and monetary policy becomes completely ineffective because economic agents prefer holding liquid cash rather than investing in bonds or assets due to expectations of adverse future conditions. Under such conditions, increasing the money supply fails to lower interest rates or stimulate aggregate demand.
More Economics Economic Basics questions
- In the context of fiscal policy, what does the 'Ricardian Equivalence Theorem' suggest about government…
- Analyze the concept of 'Ricardian Equivalence' proposed by David Ricardo and revived by Robert Barro. What…
- Which of the following economic concepts describes the minimum rate of return that a firm must earn on its…
- What does the term 'Opportunity Cost' signify in economic theory?
- What does 'Stagflation' describe in macroeconomics?