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Which of the following statements is/are correct regarding the Liquidity trap?
1. It is a situation in which monetary policy becomes ineffective to spur demand for goods and services.
2. It often leads to a deflationary spiral where people delay spending options.
Select the correct answer using the code given below.
1. It is a situation in which monetary policy becomes ineffective to spur demand for goods and services.
2. It often leads to a deflationary spiral where people delay spending options.
Select the correct answer using the code given below.
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'C'. Can you explain this answer?
Most Upvoted Answer
Which of the following statements is/are correct regarding the Liquidi...
- The concept of liquidity trap was first developed by economists J.M Keynes and J.H. Hicks in 1937, as an economic condition first observed after the Great Depression of the 1930s.
- In a standard economy, a reduction in interest rates encourages both borrowing and spending levels on part of both producers and consumers and this leads to an improvement in the aggregate demand levels of an economy, thereby leading to a corresponding rise in the GDP of the country.
- However, an expansionary monetary policy through lowering borrowing rates are ineffective when the interest rates are already close to zero, as any further reduction has no effect on the borrowing patterns of individuals. Due to prevailing depressed demand and production levels, individuals prefer to hoard capital rather than investing.
- This situation is known as the liquidity trap and the expansionary monetary policy (increase in the money supply) of Central bank becomes ineffective to boost economic growth. The liquidity trap is the inability of a central bank to stimulate economic growth through interest rate cuts. Hence, statement 1 is correct.
- If low-interest rates can’t stimulate people to spend enough to keep the workforce at full employment, the risk is that a liquidity trap will set off a deflationary spiral in which prices fall, causing people to delay spending, which makes prices fall even more, and so on down. Hence, statement 2 is correct.
- Starting in the 1990s, Japan faced a liquidity trap. Interest rates continued to fall and yet there was a little incentive in buying investments. Japan faced deflation through the 1990s, and of 2019 still has a negative interest rate of -0.1%.
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Which of the following statements is/are correct regarding the Liquidi...
Liquidity Trap:
• A liquidity trap is a situation in which interest rates are so low that injecting additional funds into the economy through monetary policy becomes ineffective.
• The theory of liquidity trap suggests that people prefer to hold cash rather than invest or spend it when interest rates are very low.
• The primary reason for the liquidity trap is the fear of deflation or falling prices. In this situation, people delay spending in the hope of getting a better deal later.
• The liquidity trap often leads to a deflationary spiral where people delay spending options, which further reduces the demand for goods and services, leading to lower prices, and ultimately a recession.
• The liquidity trap can also be caused by a lack of confidence in the government or central bank's ability to manage the economy.
• The liquidity trap can be challenging for policymakers, as traditional monetary policy tools, such as interest rate cuts, become ineffective.
• To tackle the liquidity trap, policymakers may resort to unconventional measures like quantitative easing, negative interest rates, and fiscal stimulus.
Conclusion:
The liquidity trap is a challenging situation for policymakers as conventional monetary policy measures become ineffective. The fear of deflation and a lack of confidence in the government's ability to manage the economy are the primary reasons for the liquidity trap. Policymakers may resort to unconventional measures to tackle the liquidity trap.
• A liquidity trap is a situation in which interest rates are so low that injecting additional funds into the economy through monetary policy becomes ineffective.
• The theory of liquidity trap suggests that people prefer to hold cash rather than invest or spend it when interest rates are very low.
• The primary reason for the liquidity trap is the fear of deflation or falling prices. In this situation, people delay spending in the hope of getting a better deal later.
• The liquidity trap often leads to a deflationary spiral where people delay spending options, which further reduces the demand for goods and services, leading to lower prices, and ultimately a recession.
• The liquidity trap can also be caused by a lack of confidence in the government or central bank's ability to manage the economy.
• The liquidity trap can be challenging for policymakers, as traditional monetary policy tools, such as interest rate cuts, become ineffective.
• To tackle the liquidity trap, policymakers may resort to unconventional measures like quantitative easing, negative interest rates, and fiscal stimulus.
Conclusion:
The liquidity trap is a challenging situation for policymakers as conventional monetary policy measures become ineffective. The fear of deflation and a lack of confidence in the government's ability to manage the economy are the primary reasons for the liquidity trap. Policymakers may resort to unconventional measures to tackle the liquidity trap.
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Which of the following statements is/are correct regarding the Liquidity trap?1. It is a situation in which monetary policy becomes ineffective to spur demand for goods and services.2. It often leads to a deflationary spiral where people delay spending options.Select the correct answer using the code given below.a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'C'. Can you explain this answer?
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Which of the following statements is/are correct regarding the Liquidity trap?1. It is a situation in which monetary policy becomes ineffective to spur demand for goods and services.2. It often leads to a deflationary spiral where people delay spending options.Select the correct answer using the code given below.a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'C'. Can you explain this answer? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Which of the following statements is/are correct regarding the Liquidity trap?1. It is a situation in which monetary policy becomes ineffective to spur demand for goods and services.2. It often leads to a deflationary spiral where people delay spending options.Select the correct answer using the code given below.a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'C'. Can you explain this answer? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Which of the following statements is/are correct regarding the Liquidity trap?1. It is a situation in which monetary policy becomes ineffective to spur demand for goods and services.2. It often leads to a deflationary spiral where people delay spending options.Select the correct answer using the code given below.a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'C'. Can you explain this answer?.
Which of the following statements is/are correct regarding the Liquidity trap?1. It is a situation in which monetary policy becomes ineffective to spur demand for goods and services.2. It often leads to a deflationary spiral where people delay spending options.Select the correct answer using the code given below.a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'C'. Can you explain this answer? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Which of the following statements is/are correct regarding the Liquidity trap?1. It is a situation in which monetary policy becomes ineffective to spur demand for goods and services.2. It often leads to a deflationary spiral where people delay spending options.Select the correct answer using the code given below.a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'C'. Can you explain this answer? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Which of the following statements is/are correct regarding the Liquidity trap?1. It is a situation in which monetary policy becomes ineffective to spur demand for goods and services.2. It often leads to a deflationary spiral where people delay spending options.Select the correct answer using the code given below.a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'C'. Can you explain this answer?.
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