How To Guide For: Understanding The Liquidity Trap
A Liquidity Trap occurs when low / zero interest rates fail to stimulate consumer spending and monetary policy becomes ineffective. In this situation, an increase in the money supply could fail to increase spending because interest rates can't fall further. A liquidity trap means consumers' preference for liquid assets (cash) is greater than the rate at which the quantity of money is growing. So any attempt by policymakers to get individuals to hold non-liquid assets in the form of consumption by increasing the money supply won't work. Liquidity Traps occur because of expectations of deflation, preference for saving, credit crunch, unwillingness to hold bonds and banks don't pass base rate cuts onto consumers. Due to all these factors the the liquidity trap has a huge impact on the economy. To get more in depth information on Liquidity Trap click on the pictures below to read the articles.