Economics • Economic BasicsMedium
Which of the following describes the 'Liquidity Trap' situation identified by John Maynard Keynes?
A. Interest rates are extremely low, and people prefer holding cash rather than bonds, rendering monetary policy ineffective.✓ Correct Answer
B. Commercial banks refuse to lend money to any borrower due to severe asset impairment.
C. The central bank runs out of foreign exchange reserves to defend its currency.
D. Tax revenues drop drastically during a deep economic depression.
💡 Solution & Explanation
A liquidity trap occurs when interest rates are near zero and public preference for holding liquid cash over bonds becomes absolute, rendering conventional monetary easing ineffective because money supply expansion fails to lower interest rates further. This economic phenomenon highlights the limitations of monetary policy during severe recessions. Macroeconomic concepts are regularly evaluated in competitive economics papers.
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