Liquidity trap

Interest rates near zero lower bound

In a liquidity trap, changes in the money supply do not affect inflation. People hold cash expecting adverse events like deflation or insufficient aggregate demand. Historical examples include the Great Depression, the Great Recession, and Japan's Lost Decades.

Example

During the Great Recession, interest rates were near zero, and despite monetary policy efforts, inflation remained low, demonstrating a liquidity trap.

Remember this

Understanding liquidity traps helps policymakers design effective strategies to escape them and stabilize economies.

Text adapted from Wikipedia, licensed under CC BY-SA 4.0.

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Educational content, not financial advice.

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