Question

The term "liquidity trap" describes a macroeconomic scenario in which

Answer 1

Low interest rates cause people to hoard money, making output and employment stagnate.

The concept of the liquidity trap was first proposed by John Maynard Keynes. He believed that if interest rates were extremely low, people would hoard money in the believe that interest rates could only increase. This results in a stagnation in the level of investment, which would theoretically halt the growth of income and employment. For this reason, Keynes and his proponents maintained that fiscal policy, rather than monetary policy, would be the most effective tool for leaving the great depression.