A liquidity trap is a situation described in Keynesian economics 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 an adverse event such as deflation, insufficient aggregate demand, or war. Signature characteristics of a liquidity trap are short-term interest rates that are near zero and fluctuations in the monetary base that fail to translate into fluctuations in general price levels.
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Famous quotes containing the word trap:
“All Coolidge had to do in 1924 was to keep his mean trap shut, to be elected. All Harding had to do in 1920 was repeat “Avoid foreign entanglements.” All Hoover had to do in 1928 was to endorse Coolidge. All Roosevelt had to do in 1932 was to point to Hoover.”
—Robert E. Sherwood (1896–1955)