Monetary Policy

Question 1

Liquidity trap (amount of money in circulation)

Answer 1

Situation in which conventional monetary policy begins to lose traction

In spite of low Intrest rates

Economic agents prefer to save than spend

Usually due to low business/consumer confidence

Question 3

Liquidity trap explanations

Answer 3

As rates approach 0 difficult to cut them futher

If rates below long-run averages people expect them to rise in the future (problem because policy doesn’t stimulate AD)

During a recession bussines/consumer confidence is too low for people to spend/take on debt

Effectively making demand for loans inelastic