Why there is liquidity trap in the reality?

When the interest rate is low enough, monetary policy will fail to work, because:

1. interest rate cannot be lower than zero. Given the circumstances that the interest rate is low enough, the amount of money central bank inject into the private banks will not reduce the interest rate further.

2. consumption will not be boosted by decreasing in interest rate when it is approaching zero. Interest rate is no the only factor that influence the household consumption. When the interest rate is very low, a further decrease brings no difference.

Answered by Sijia Q. Economics tutor

1805 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

Explain how The Monetary Policy Committee controls inflation within the UK economy.


Despite a plunge in the value of Sterling during 2016, the UK managed to post the highest current account deficit on record. Why did the plunge in sterling not translate into a reduction in the CA deficit?


Why is supply side policy used a lot in modern economies?


To what extent do consumers benefit from price discrimination by a firm with monopoly power? (8 Marks)


We're here to help

contact us iconContact usWhatsapp logoMessage us on Whatsapptelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

© MyTutorWeb Ltd 2013–2024

Terms & Conditions|Privacy Policy