Liquidity Trap
Liquidity trap is an economic situation in which an increase in the money supply fails to lower interest rates and stimulate economic growth. It occurs when the nominal interest rate is close to zero and the central bank is unable to stimulate the economy by lowering interest rates. In this situation, the central bank is unable to expand the money supply and stimulate economic activity. This can lead to a prolonged period of economic stagnation and deflation.
History of the Term
The concept of a liquidity trap was first proposed by John Maynard Keynes in his 1936 book, The General Theory of Employment, Interest and Money. Keynes argued that when the nominal interest rate is close to zero, the central bank is unable to stimulate the economy by lowering interest rates. This can lead to a prolonged period of economic stagnation and deflation. In the decades since, the concept of a liquidity trap has been widely accepted by economists.
Comparisons
| Interest Rate | Economic Stimulus |
|---|---|
| High | Increased |
| Low | Decreased |
| Near Zero | None |
Summary
In summary, a liquidity trap is an economic situation in which an increase in the money supply fails to lower interest rates and stimulate economic growth. It occurs when the nominal interest rate is close to zero and the central bank is unable to stimulate the economy by lowering interest rates. This can lead to a prolonged period of economic stagnation and deflation. For more information about liquidity traps, you can visit the websites of the Federal Reserve, the International Monetary Fund, and the World Bank.
See Also
- Monetary Policy
- Inflation
- Deflation
- Interest Rates
- Money Supply
- Economic Stimulus
- Keynesian Economics
- Monetarism
- Fiscal Policy
- Recession
