Economics · Macroeconomics
The term 'liquidity trap' in Keynesian economics refers to a situation where:
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The financial system achieves perfect liquidity with zero transaction costs
- 2Interest rates are so low that nominal monetary expansion becomes completely ineffective✓
- 3Interest rates are extremely high, discouraging real investment
- 4Banks hoard money and refuse to lend to consumers
Correct answer
Interest rates are so low that nominal monetary expansion becomes completely ineffective
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