A situation where expansionary monetary policies are ineffective because nominal interest rates are already low is called:
A) a liquidity drop.
B) a liquidity trap.
C) a illiquidity drop.
D) an illiquidity trap.

Question

Quizplus · Accepted Answer

A liquidity trap occurs when nominal interest rates are already close to zero or at zero percent, and expansionary monetary policies such as lowering the interest rate further are ineffective in stimulating economic growth. In this situation, households and businesses may prefer to hold on to their money rather than investing or spending it, leading to a decrease in aggregate demand and economic stagnation.

A Situation Where Expansionary Monetary Policies Are Ineffective Because Nominal