liquidity trap

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Liquidity Trap

A recession during which banks are unwilling to lend and nominal interest rates are already at or near zero. Because interest rates are so low, the central bank can do nothing further to expand the money supply. At the same time investors are unwilling to invest to help the economy grow because banks are unwilling to lend because their returns are so low. This extends the recession and indeed makes it worse. Many economists believe that the best way to end a liquidity trap is a money gift, where the government directly transfers money to consumers in hopes that they will spend it to spur investment.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

liquidity trap

a situation where the INTEREST RATE is so low that people prefer to hold money (LIQUIDITY PREFERENCE) rather than invest it. At low rates of interest, the MONEY DEMAND SCHEDULE becomes infinitely elastic. In these circumstances, any attempt by monetary policy to lower interest rates in order to stimulate more INVESTMENT (see MONEY SUPPLY/SPENDING LINKAGES) will be futile, and will simply result in more money being held. KEYNES argued that in a depressed economy that is experiencing a liquidity trap the only way to stimulate investment is to increase GOVERNMENT EXPENDITURE or reduce TAXES in order to increase AGGREGATE DEMAND and improve business confidence about future prosperity, encouraging people to invest.
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
References in periodicals archive ?
'Helicopter drop of money' is used as a metaphor for an unconventional monetary policy tool that typically involves central banks printing large sums of money and distributing it directly to the public or investing in public projects.
Second, QE could evolve into a "helicopter drop" of money or direct monetary financing by central banks of larger fiscal deficits.
According to Flatten, the dispatch office couldn't reach anyone with the authority to approve the helicopter drop. Forest Service District Commander John Newcom, Fire Manager Peter Sodoquist, and a biologist huddled for two hours to determine whether or not they could grant an exemption for the helicopter drop.
"It's going to be very frustrating [for Draghi] if just a few weeks after a second package of policy measures was announced, there's a clamor to discuss a helicopter drop," Ken Wattret, an economist with BNP Paribas in London, told the Journal.
The race kicks off with a helicopter drop off into the heart of the jungle.
ON one walk, the RAF made their donation to the fund via a helicopter drop at the side of a road.
air drop A Chinook helicopter drops bags of aggregate on the dam
An RAF Chinook helicopter drops sandbags through the swell crack to help repair the dam at Toddbrook reservoir DANNY LAWSON
RISK: An RAF Chinook helicopter drops huge sandbags on to the damaged section of dam in a bid to stabilise it
Helicopter drops tons from reservoir The service said crews also had to cope with another moor fire a few miles further south, involving 50 acres of land near Shipley.

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