Keynesian Economics describes liquidity trap as a situation when pumping a certain cash amount into the privately controlled banking system, and does not have low-interest rates. Â It, in turn, makes monetary policy ineffective.
It is an important topic in economics and students must have thorough knowledge on its causes and impacts. They need to consider all these factors to complete their liquidity trap homework answers easily.
An insight into the concept:
The condition occurs when people expect any adverse event such as war like situation, deflation, and insufficient aggregate demand. In those situations, people feel unconfident to spend their money and hoard cash hence it leads to a liquidity trap.
While writing liquidity trap homework answers, students need to describe the conditions and causes of a liquidity trap in an elaborative way. Some text books are unable to provide enough information.
In such situation, they can take help of some external sources such as online resources, homework help providers or some books from some renowned economists.
Various categories of theories:
Teachers expect students to mention both traditional and modern theories in liquidity trap homework answers:
There is a huge debate between the traditional economists and modern economists regarding liquidity theory trap. According to the traditional theory, it is assumed that the LM curve becomes perfectly elastic at some degree of the nominal interest.
While modern economists have monitored the situation more carefully spell out the causes which may result in a liquidity trap.Manuals as liquidity trap homework answers can be of real help in this case.
While studying the causes of liquidity traps, it is important to know about the prolonged Japanese depression when Bank of Japan was unable to anything to bring the situation under control.
Transmission mechanism of monetary policy:
There are only two assets in simple IS-LM-AS set up- money and bonds. Money pays an exogenous nominal interest rate, and bonds pay an endogenous nominal interest rate. For analysing this policy, one must have a thorough knowledge of money market equilibrium condition.
Monetary policy adjusts the relative supply of bonds and money. Suppose the apex bank reduces the supply of bonds and surges the supply of money by exactly the same amount. To attract private agents and reallocation of a portfolio from bonds to money the nominal interest rate needs to be reduced.
Due to the exogenous nature of real interest rate, plunge in the nominal interest rate needs a fall in expected inflation. To meet an expected future price one needs to increase the current prices.
In this case, the transmission mechanism is concerned only with goods prices, leaving real asset returns unchanged.
If existing rates are sticky then to fulfil anticipated future price, expected inflation is fixed. The necessary downfall in the nominal interest rate can only be accomplished by an adjustment in the real interest rate. In this case, the modification in the relative supply of assets influences real asset returns and real activity.
Money market equilibrium condition:
It is a related term to a liquidity trap and must be known so that you can explain transmission mechanism of monetary policy in a better way.
Money market equilibrium occurred when the amount of money demanded, and quantity supplied are equivalent.Â While learning about money market equilibrium, it is important to know that what happens when the demand for money increases or decreases, or when the supply of money decreased or increased by the Federal Reserve.
For writing effective liquidity trap homework answers, it is important to know that there is a strong relationship between monetary policy and market equilibrium. Monetary policy influences the equilibrium if and only if t can change asset returns. During liquidity trap, monetary policy cannot alter asset returns.
Things to learn in a liquidity trap:
It is believed that the downfall in wealth related to the collision of the 90sÂ asset markets and the requirement to have savings for retirement in the event of a shrinking population affects consumption.
The factor together with the investment following the asset market crash and the unwillingness of Japanese leaders to grant money have shifted the IS curve to a position where Japan’s equilibrium real interest rate is negative.
Moreover, as the rates have been declining for some time, anticipations of further deflation may also have set in, additionally stopping the real interest rate from getting negative.
For an economy, demands for goods can be higher at any level of the interest rate. In order to raise investment demand, an economy requires higher expected inflation for the real interest rate to decline in the event of a zero bound on nominal rates.
In a case, existing prices cannot decline in that case the real interest rate cannot be reduced by the amount required to clear markets.
It is a theoretical subject with very little calculation. Writing liquidity trap homework answers needs lots of attention. So make sure that there is no one to disturb you. Sometimes, it may happen that you are loaded with excessive homework. In that case, it is better to take liquidity trap homework help from any reliable online homework provider.Â You may need to refer to several resources to understand the subject and write liquidity trap homework answers correctly.Â Don’t struggle alone when you are unable to solve your homework. Just search for a reliable help provider and get your all the doubts clear.