Liquidity Trap: Definition, Causes, and Examples

A liquidity trap can occur when consumers and investors hoard cash and refuse to spend even when economic policymakers cut interest rates to stimulate economic growth.

1. If the economy is currently in a liquidity trap, an increase in the money supply would shift the MS curve _ and interest rates would _. A. right; decrease B. right;

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A liquidity trap implies monetary policy is ineffective, and this may occur when the interest rates is close to 0 and can not go lower. a. True. b. False.

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The liquidity trap: A. Refers to the vertical portion of the money demand curve. B. Refers to the possibility that interest rates may not respond to changes in the money supply. C.

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Liquidity Trap: Definition & Causes