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Which among the following economic scenarios lead to “Liquidity trap”?
- a)When speculative demand for money is very low.
- b)When there is a high interest rate prevailing in the economy.
- c)When every economic agent expects the interest rate to rise in the future.
- d)When there is a high demand to buy bonds.
Correct answer is option 'C'. Can you explain this answer?
Most Upvoted Answer
Which among the following economic scenarios lead to “Liquidity trap”...
Option (c) is the correct answer.
Liquidity trap is a situation of very low rate of interest in the economy where every economic agent expects the interest rate to rise in the future and consequently bond prices to fall, causing capital loss. Everybody holds her wealth in money and speculative demand for money is infinitely elastic in this case.
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Community Answer
Which among the following economic scenarios lead to “Liquidity trap”...
Explanation:
Expectation of rising interest rates:
When every economic agent expects the interest rates to rise in the future, they are less likely to spend or invest currently. This expectation leads to a decrease in consumption and investment, resulting in a decrease in overall economic activity. As a result, the economy may fall into a liquidity trap.
In a liquidity trap, even if the central bank tries to stimulate the economy by lowering interest rates, it may not be effective as people prefer holding onto cash rather than spending or investing. This situation can further exacerbate the economic downturn and make it difficult for monetary policy to have its usual impact on the economy.
Therefore, the scenario where every economic agent expects interest rates to rise in the future can lead to a liquidity trap, hindering the effectiveness of monetary policy in stimulating economic growth.
Expectation of rising interest rates:
When every economic agent expects the interest rates to rise in the future, they are less likely to spend or invest currently. This expectation leads to a decrease in consumption and investment, resulting in a decrease in overall economic activity. As a result, the economy may fall into a liquidity trap.
In a liquidity trap, even if the central bank tries to stimulate the economy by lowering interest rates, it may not be effective as people prefer holding onto cash rather than spending or investing. This situation can further exacerbate the economic downturn and make it difficult for monetary policy to have its usual impact on the economy.
Therefore, the scenario where every economic agent expects interest rates to rise in the future can lead to a liquidity trap, hindering the effectiveness of monetary policy in stimulating economic growth.
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Which among the following economic scenarios lead to “Liquidity trap”?a)When speculative demand for money is very low.b)When there is a high interest rate prevailing in the economy.c)When every economic agent expects the interest rate to rise in the future.d)When there is a high demand to buy bonds.Correct answer is option 'C'. Can you explain this answer?
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Which among the following economic scenarios lead to “Liquidity trap”?a)When speculative demand for money is very low.b)When there is a high interest rate prevailing in the economy.c)When every economic agent expects the interest rate to rise in the future.d)When there is a high demand to buy bonds.Correct 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 among the following economic scenarios lead to “Liquidity trap”?a)When speculative demand for money is very low.b)When there is a high interest rate prevailing in the economy.c)When every economic agent expects the interest rate to rise in the future.d)When there is a high demand to buy bonds.Correct 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 among the following economic scenarios lead to “Liquidity trap”?a)When speculative demand for money is very low.b)When there is a high interest rate prevailing in the economy.c)When every economic agent expects the interest rate to rise in the future.d)When there is a high demand to buy bonds.Correct answer is option 'C'. Can you explain this answer?.
Which among the following economic scenarios lead to “Liquidity trap”?a)When speculative demand for money is very low.b)When there is a high interest rate prevailing in the economy.c)When every economic agent expects the interest rate to rise in the future.d)When there is a high demand to buy bonds.Correct 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 among the following economic scenarios lead to “Liquidity trap”?a)When speculative demand for money is very low.b)When there is a high interest rate prevailing in the economy.c)When every economic agent expects the interest rate to rise in the future.d)When there is a high demand to buy bonds.Correct 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 among the following economic scenarios lead to “Liquidity trap”?a)When speculative demand for money is very low.b)When there is a high interest rate prevailing in the economy.c)When every economic agent expects the interest rate to rise in the future.d)When there is a high demand to buy bonds.Correct answer is option 'C'. Can you explain this answer?.
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