A liquidity trap is...
A)A strategy that an investor would use to gain his competitor's liquid assets.
B)A situation where the liquidity in the market created by low interest rates does not stimulate the economy to full employment.
C)A strategy that banks use to trap house owners to pay their mortgages.
D)A situation when liquid assets become illiquid because they are unable to be sold or bought.

Question

Quizplus · Accepted Answer

A liquidity trap describes the situation where the liquidity in the market created by low interest rates does not stimulate the economy to full employment.
Key Takeaway: The nominal interest rate cannot drop below zero. Any further injection of liquidity will not further lower the nominal interest rate.

A Liquidity Trap Is