Keynesians argue that monetary policy is NOT effective if there was a liquidity trap.
What is liquidity trap?
A liquidity trap develops when investors select lower-yielding assets over hoarding cash due to a bleak outlook for the economy. Bonds aren't the only thing affected by a liquidity trap; other sectors of the economy also suffer as a result of consumers' reduced spending, which might make employers less eager to hire.
Does inflation result from a liquidity trap?
The liquidity trap is examined in a recent piece in the regional Economist. A growth in the money supply (such as that brought on by the Federal Reserve's massive asset purchases) typically results in higher inflation since more money is chasing the same amount of goods.
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