Friday, July 19, 2024

Liquidity Trap

In this article, We learn about “Liquidity Trap “.Let’s Go!

A Liquidity Trap is an economic condition in which people hoard money instead of investing or spending it.

Therefore, a country’s central bank cannot use expansionary monetary policy to promote economic growth.

This typically occurs when short-term interest rates are zero (ZIRP) or negative (NIRP).

Liquidity traps cause central bank monetary policy to become ineffective.

What happens in a liquidity trap?

Central banks are responsible for managing liquidity through monetary policy.

Their main tool is to lower interest rates to encourage borrowing.

This makes loans cheap, encouraging businesses and households to borrow money for investment and consumption.

Liquidity traps often occur after severe economic downturns. No matter how much credit is available, households and businesses are afraid to spend money.

This is what happens in a liquidity trap.

Central banks try to make borrowing affordable by providing credit at low interest rates.

However, instead of borrowing money to spend, businesses and households are hoarding cash.

They don’t have the confidence to spend, so they do nothing.

Central banks cannot boost the economy because there is no demand.

If you want to learn more foreign exchange trading knowledge, please click: Trading Education.

Read more

Local News