The Liquidity Trap Explained

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A liquidity trap is an economic situation characterized by very low interest rates and a high level of savings, where monetary policy becomes ineffective in stimulating economic activity. In a liquidity trap, despite central banks implementing expansionary monetary policy by lowering interest rates and increasing the money supply, households and businesses hoard cash rather than spending or investing it. This behavior is driven by expectations of deflation or economic uncertainty, as well as a preference for liquidity and safe assets. As a result, even with ample liquidity in the financial system, interest rates remain low, and borrowing and spending do not increase sufficiently to stimulate demand and economic growth. Liquidity traps are particularly challenging for policymakers because conventional monetary tools lose their effectiveness, leaving fiscal policy as the primary option for addressing economic stagnation. The term liquidity trap gained prominence during the Great Depression and has since been revisited during periods of prolonged economic downturns, such as the global financial crisis of 2008-2009 and the aftermath of the COVID-19 pandemic. • • Contact us on Social Media • Tiktok: / anthonyfok86 • Instagram: / anthonyfok86 • • ========================== • • 👇👇 Subscribe For More Videos 👇👇 • https://rb.gy/0pkhx • Peace ♥ • • #jceconomics #alevel #aleveleconomics #alevels #cambridge #sgparents #sgtuition #sgeconomics #juniorcollege #igcse #igcseeconomics #economics

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