The term liquidity trap describes a macroeconomic scenario in which

Posted By Admin @ September 03, 2022


The term liquidity trap describes a macroeconomic scenario in which:

A. low interest rates cause people to hoard money, making output and employment stagnate.
B. increased levels of imports cause a country to shift away from manufacturing, which leads to increasingly higher levels of imports.
C. an excess of cash is introduced into the economy, causing large levels of inflation.
D. low interest rates cause firms to shift toward capital and away from labor, increasing unemployment.



low interest rates cause people to hoard money, making output and employment stagnate.


The Liquidity trap is a keynesian Microeconomics situation wherein interest rate offered are very low and saving rates are comparatively high. This induces consumers to save money in cash and not invest their money in bonds and other investment options. This trap not only affects investment in economy but also other areas because of low investment by people , business will start producing low and hiring will also be lowered.

One of the solution to avoid liquidity trap is to increase interest rate so that people are motivated to invest.

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