What is a liquidity trap?

What is a liquidity trap?In this age of recession and shrinking world economies, governments, in a bid to increase aggregate demand (AD), may lower interest rates to encourage spending. This is because a lower interest rate makes spending relatively more attractive to consumers and businesses than saving in banks. When a government continues to lower interest rates repeatedly and they reach a level of 0% without correlated increase in AD, then it is called a liquidity trap.

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