Interest rates near zero lower bound
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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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