The term ‘Liquidity Trap’ in Keynesian economics describes a situation where:
ACommercial banks have zero liquid reserves
BInterest rates are so low that people hoard cash and monetary expansion fails to lower interest rates further
CInflation reaches hyperinflationary levels
DThe central bank runs out of gold reserves
Explanation
In a liquidity trap, the demand for money becomes perfectly elastic at very low interest rates, rendering conventional monetary policy ineffective.
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