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.

SQ
Answered by Sijia Q. Economics tutor

2332 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

Can you explain the difference between joint demand and competitive demand?


Define market failure and give two examples in which this may occur.


How would you go about calculating inflation using CPI (consumer price index)


To what extent is (third degree) price discrimination beneficial to consumers and producers?


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

MyTutor is part of the IXL family of brands:

© 2025 by IXL Learning