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MENTAL MODEL · M1227

Liquidity Trap

Liquidity Trap
BusinessHigh supportEconomics
Included
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Version 1.0.0 · Updated 2026-07-30

CORE DEFINITION

When interest rates fall to extremely low levels (near zero), people prefer to hold cash rather than consume or invest, and at this point, no matter how much money the central bank issues (loose monetary policy), it cannot stimulate the economy.

SCAFFOLDING EFFECT

psychology

Reduce cognitive load

- Pushing on a string effect: explains why "printing money" is useless during economic depressions. What is needed at this time is "confidence" and "structural reforms", or direct fiscal spending (pulling on a string).

anchor

Anchor fast decisions

When interest rates have already fallen to extremely low levels, the public expects that rates will only rise (bond prices will only fall), so they prefer to hold money rather than invest, making traditional expansionary monetary policy ineffective and leaving the economy in a state of insufficient demand.

MINIMUM ACTION

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Source support: Explicit

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    en.wikipedia.orghttps://en.wikipedia.org/wiki/Liquidity_trapZH · Explicit
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