Current Affairs · Macroeconomics and Monetary Policy
In a situation where interest rate cuts fail to stimulate private consumption and investment demand because banks park excess liquidity with the central bank rather than lending, what is the technical economic term for this condition, and what is the recommended fiscal remedy?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The term is 'Paradox of Thrift'; the government should encourage everyone to stop spending and save more.
- 2The term is 'Fiscal Drag'; the government should print more currency notes to pay off its debt.
- 3The term is 'Liquidity Trap'; the government should focus on 'Quality of Expenditure' by shifting from revenue subsidies to high-multiplier capital expenditure (Capex).✓
- 4The term is 'Rational Expectations'; the government should double the repo rate to force people to spend.
Correct answer
The term is 'Liquidity Trap'; the government should focus on 'Quality of Expenditure' by shifting from revenue subsidies to high-multiplier capital expenditure (Capex).
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