An economy with very low rate of interest and where economic agents expect the interest rate to rise in future and consequently bond prices to fall, causing capital loss in the economy is going through a situation known as
Options:
A . Double dip recession
B . Slow down in the economy
C . Hyperinflation
D . Liquidity trap
Answer: Option D Answer: (d) A liquidity trap is a situation in which injections of cash into the private banking system by a central bank fail to lower interest rates and hence fail to stimulate economic growth. A liquidity trap is caused when people hoard cash because they expect interest to rise in future, an adverse event such as deflation, insufficient aggregate demand, or war.
Submit Comment/FeedBack