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.

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.
References in periodicals archive ?
A helicopter drop (through tax cuts or transfers financed by newly printed money) would put money directly into the hands of households, boosting consumption.
According to Flatten, the dispatch office couldn't reach anyone with the authority to approve 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.
Firefighters can carry about 300 feet of hose on their backs, but once it's extended, it would make sense to have a helicopter drop off additional hose rather than having firefighters running up and down steep, rocky terrain, said fire spokesman Capt.
2) Firefighters watch a helicopter drop water on a brush fire that flared Friday in the hills north of Valencia, east of the Golden State Freeway.
ON one walk, the RAF made their donation to the fund via a helicopter drop at the side of a road.
The Water Resources Department and the Metropolitan Water District suggested the treatment, a helicopter drop next Thursday of 15,000 pounds of copper sulfate pellets into the reservoir.
Conceived in 1969 by Milton Friedman as part of a thought experiment -- not an actual proposal -- helicopter drops got their name from the fantastic vision of fresh money being scattered from a helicopter whirring overheard.
A helicopter drops giant sandbags into the gap in Llanbedr coast defences yesterday
Much-needed employment for Cammell Laird, stripping down decommissioned ships to a bare floating hulk, which could then be moored offshore and supplied by helicopter drops of basic foods.
Firefighters have attacked the blaze with aircraft water tankers and helicopter drops.

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