Economics • Economic BasicsMedium
What does the 'Liquidity Trap' situation imply according to Keynesian economics?
A. Interest rates are at very low levels and monetary policy becomes ineffective as people hoard cash.✓ Correct Answer
B. Commercial banks refuse to lend money to any borrower regardless of collateral.
C. The central bank holds infinite foreign exchange reserves with zero domestic currency in circulation.
D. Consumers spend all their disposable income instantly without holding any savings.
💡 Solution & Explanation
A liquidity trap occurs when nominal interest rates are extremely low and expected to rise, causing individuals to hoard cash and making traditional monetary policy ineffective. Other distractors incorrectly describe situations like unconditional credit freezes or zero currency circulation.
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