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Limitations of Monetary Policy

Liquidity Trap

Liquidity Trap

Sometimes, when the money supply is increased, as shown by the Liquidity Preference-Money Supply (LM) curve shift, it has no impact on output (GDP or Y) or on interest rates. This is a liquidity trap.

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    "Liquidity trap IS-LM."
    http://en.wikipedia.org/wiki/File:Liquidity_trap_IS-LM.svg Wikipedia CC BY-SA.

Related Terms

  • deflation
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