The situation in which the central bank increases the money supply, but the money multiplier falls enough to offset increases in reserves is known as a:

Question

Quizplus · Accepted Answer

A liquidity trap occurs when the central bank injects money into the economy (increasing the money supply), but the increase in reserves does not lead to a proportional increase in lending and economic activity. This is because the money multiplier falls, often due to very low or zero interest rates, where people prefer to hold onto cash or safe assets rather than borrowing or investing.

The Situation in Which the Central Bank Increases the Money