A liquidity trap is a situation described in Keynesian economics in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels.
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Famous quotes containing the word trap:
“And boys, be in nothing so moderate as in love of man, a clever
servant, insufferable master.
There is the trap that catches noblest spirits, that
caught—they say—God, when he walked on earth.”
—Robinson Jeffers (1887–1962)