Question

What is a 'liquidity trap'?

Answer 1

The liquidity trap refers to the situation where monetary policy becomes ineffective as the interest rate becomes less and the general public is more interested in savings.

It is said to be the extreme impact of monetary policy which does not result in an increased interest rate and therefore is not able to fuel economic growth.

Also read:

• Fiscal Deficit
• Difference Between Monetary Policy and Fiscal Policy

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