Liquidity Trap (HINDI)

Liquidity Preference Theory of Interest
Liquidity Preference Theory of Interest
When monetary policy becomes ineffective because, despite zero/very low-interest rates, people want to hold cash rather than spend or buy illiquid assets.
A liquidity trap is characterised by
Very low-interest rates
Low inflation
Slow/negative economic growth
Preference for saving rather than spending and investment
Monetary policy becomes ineffective in boosting demand
Solutions to a liquidity trap
Keynesians argue in a liquidity trap, we need to use expansionary fiscal policy
Modern Monetary Theorist argues we should target a higher inflation rate, increase inflation expectations and increase the money supply – putting cash into households hands directly if necessary.
Monetarists argue Central Banks should use quantitative easing to increase the money supply, and if necessary purchase bonds and assets to reduce yields on corporate and government bonds.
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