A liquidity trap occurs when ________.
A) the central bank cannot lower policy rates below zero
B) government spending crowds out private investment
C) planned investment equals zero
D) money is no longer considered a liquid asset

Question

Quizplus · Accepted Answer

A liquidity trap occurs when the central bank has lowered interest rates to zero, yet households and firms are still unwilling to borrow, invest, or spend. In this situation, monetary policy becomes ineffective because further reductions in interest rates cannot stimulate borrowing and spending.

A Liquidity Trap Occurs When ________