Liquidity Trap

  liquid en gob is a situation in which the noun phrase wager rate is close or mate to goose egg and monetary policy is unable to feature the economy. In such(prenominal) situation, the opportunity cost of holding money is cipher and although monetary authority gains money supply in the economy, stack bequeath still prefer to hold their cash. Hence, the cash world held may not be converted into new investment. Liquidity trap is normally pissd by deflation and will finally cause pertinacious deflation thereafter. Persistent deflation combined with the low nominal pursual rate, it creates a huffish economy with further expectations of deflation that result in higher(prenominal) real post rate (Figure 1). As expectations of prices are lower, people cut down their breathing in. Fisher Equation: titulary elicit Rate = Real Interest Rate + expect flash If the interest rate=0 and expected inflationnominal interest rate, drop activities will decrease followed by d ecrease in consumption and investment that will result in a sluggish economy. Besides that, higher preference for saving, credit flirt and unwillingness to hold bond will cause fluidity trap to occur too. The liquidity trap happening in the US was indeed from the results of the Great Recession.

The Great Recession was initially started with the not bad(p) decline in US house prices that eventually ravisher the US sub-prime market by 2007. Sub-prime is a regretful debt offered to those with unequal credit history or unstable income. in that respect was an increase in default as borrowers could not refinance to stave off the increased payments along with the rising interest rates avo cation the fall in house prices. In 2007, le! nders began foreclosure proceedings on nearly 1.3 gazillion properties.1 This increased to 2.3 million in 20082. By August 2008, 9.2% of all U.S. mortgages outstanding were either delinquencies or foreclosures3. The corner is followed by the collapse of highly leveraged financial institutions. By 2008, IndyMac, the largest...If you necessity to get a full essay, localize it on our website: OrderEssay.net

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