ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -One of the major methods of negating liquidity trap in economics is through expansionary fiscal policy. An increased government spending coupled with lower taxes has a positive impact on an economy, as it encourages production, which, in turn, increases employment levels in a country.

Detailed explanation-2: -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. Description: Liquidity trap is the extreme effect of monetary policy.

Detailed explanation-3: -A liquidity trap is a situation in which monetary policy becomes ineffective because the policymaker’s attempt to influence nominal interest rates in the economy by altering the nominal money supply is frustrated by pri-vate agents’ willingness to accept any amount of money at the current interest rate.