Question

What is a liquidity trap?

-When deflation occurs because growing debt obligations cause a decrease in aggregate demand.
-When increasing price levels result in fixed-income earners "drowning" as expenses grow while income remains constant.
-When expansionary monetary policy results in a rapidly increasing price level.
-When nominal interest rates cannot be lowered any further.

Answer 1

When nominal interest rates cannot be lowered any further.

Step-by-step explanation:

A liquidity trap occurs when Central Banks fails in its injection of cash into the private banking system to decrease interest rates.

This results in households and businesses maintaining high cash balances and not stimualting aggregate demand.