The situation in which short-term interest rates are pushed to zero, leaving the central bank unable to lower them further is known as
A)the Taylor rule.
B)a liquidity trap.
C)a zero-sum game.
D)an interest rate panic.
E)an inverted yield curve.

Question

Quizplus · Accepted Answer

A liquidity trap is a situation where monetary policy becomes ineffective, as the central bank is unable to stimulate economic growth through lowering short-term interest rates, due to the low or zero levels of interest rates already in effect. This occurs when individuals and businesses are hoarding cash, and are unwilling or unable to spend or invest, even when borrowing costs are low. This results in a stagnant economy, with little growth and no inflation, despite the best efforts of the central bank.

The Situation in Which Short-Term Interest Rates Are Pushed to Zero