How does a decrease in interest rates decrease investment rates? This is how I believe a liquidity trap works, not sure if it is correct.

Thank you

  • $\begingroup$ What definition of “investment rate” are you using? Investment in economics refers to capital expenditure. Do you mean “interest rate” of “rate of return”? $\endgroup$ – Brian Romanchuk Apr 13 '20 at 17:56
  • $\begingroup$ Investment rate as private expenditure. $\endgroup$ – user26090 Apr 14 '20 at 21:28
  • $\begingroup$ what do you mean by "Investment rate as private expenditure"? Amount of private investment of total private expenditure? Please clarify $\endgroup$ – Brennan Apr 15 '20 at 0:31
  • $\begingroup$ In that case, that’s not what a liquidity trap refers to. (Admittedly, a lot of people have mis-used the term, so there might be someone who says that.) The liquidity trap is a phenomenon in bond markets, where yields cannot get lower. $\endgroup$ – Brian Romanchuk Apr 15 '20 at 0:42
  • $\begingroup$ Total expenditure yes. $\endgroup$ – user26090 Apr 16 '20 at 14:29

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.