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

2412 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

Explain using a diagram why when people have medical insurance the PED for medical treatment is likely to be very low whilst the YED is likely to be high


How do you find the profit level of a firm graphically? Why is this the case?


Outline and evaluate the economic effects of a fall in the value of the dollar?


"Why do the central bank control monetary policy, but the government control fiscal policy?"


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