ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Which of the following is true about monetary policy in the liquidity trap? Monetary policy will be unable to reduce interest rates further to stimulate investment.

Detailed explanation-2: -A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Among the characteristics of a liquidity trap are interest rates that are close to zero and changes in the money supply that fail to translate into changes in the price level.

Detailed explanation-3: -Definition: Liquidity trap is a situation when expansionary monetary policy (increase in money supply) does not increase the interest rate, income and hence does not stimulate economic growth.

Detailed explanation-4: -What Is a Liquidity Trap? A liquidity trap is an adverse economic situation that can occur when consumers and investors hoard cash rather than spending or investing it even when interest rates are low, stymying efforts by economic policymakers to stimulate economic growth.