Liquidity traps are most likely to occur when the:
A) economy is going through a recovery.
B) economy is expanding rapidly.
C) public expects inflation.
D) public expects deflation.

Question

Quizplus · Accepted Answer

Liquidity traps typically occur when the public expects deflation, as people will hold onto their cash in anticipation of falling prices. This can lead to a situation where interest rates are at or near zero, yet monetary policy remains ineffective in stimulating economic growth.

Liquidity Traps Are Most Likely to Occur When The