Answer to Question #118501 in Microeconomics for paa kwesi

Question

Discuss the concept of liquidity trap and its implications on the conduct of monetary policy in an economy

Answer 1

Discuss the concept of liquidity trap and its implications on the conduct of monetary policy in an economy 

Liquidity traps its economic condition in which the saving rate is very high, but interest rates are meagre—providing monetary policy unsuccessfully. Mostly at this period in the economy, consumers will decide to avoid bonds and save their money in cash savings because they believe that the rate of interest may arise with time. Many customers keep away from possessing a property whose value expects to depreciate with time due to the inverse relationship between friendship and interest rates.

Monetary policy has a very important influential broke on inflation. Reduce in federal funds rate tend to increase demand and supply of good and supply in the economy which leads to increase in wages and another production cost higher, increasing the number of workers needed for production and services in the economics. 

Monetary policy affects the money supply system in the economy, which affects the rate of interest and speed of inflation. It also affects the expansion of business export net income employment, debt cost the cost of debt and saving versus the relative consumption cost all this are either impacted directly or indirectly by monetary policy in the economy.