Political Economy Keynesian Economics Questions
The liquidity trap in Keynesian Economics refers to a situation where monetary policy becomes ineffective in stimulating economic growth and reducing unemployment. It occurs when interest rates are already very low, close to zero, and further reductions fail to stimulate borrowing and investment. In this scenario, individuals and businesses prefer to hold onto their money rather than spending or investing it, leading to a decrease in aggregate demand and a stagnant economy. The liquidity trap highlights the limitations of monetary policy and the need for alternative measures, such as fiscal policy, to stimulate economic activity during times of low interest rates.