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Liquidity trap
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===2008 financial crisis=== [[File:ISLM_model_endogenous_M.png|thumb|right|The IS-LM model modified for [[endogenous money]]: The central bank controls [[Federal funds rate|interest rate]]s but not the [[Monetary base|money supply]]. The LM curve is now flat, since, when the money supply increases, the interest rate '''r''' does not move. Income '''Y''' increases from ya to yb without any rise in interest rates.]] During the [[2008 financial crisis]], as short-term interest rates for the various central banks in the United States and Europe moved close to zero, economists such as [[Paul Krugman]] argued that much of the developed world, including the United States, Europe, and Japan, was in a liquidity trap.<ref>[[Paul Krugman|Krugman, Paul R.]] (17 March 2010) "[https://archive.nytimes.com/krugman.blogs.nytimes.com/2010/03/17/how-much-of-the-world-is-in-a-liquidity-trap/ How much of the world is in a liquidity trap?]", ''[[The New York Times]]''</ref> He noted that tripling of the [[monetary base]] in the US between 2008 and 2011 failed to produce any significant effect on domestic price indices or dollar-denominated commodity prices,<ref>{{cite news|url=https://krugman.blogs.nytimes.com/2011/10/07/way-off-base-2/|title=Way Off Base | work=[[The New York Times]] | first=Paul R.|last=Krugman|author-link=Paul Krugman|date=7 October 2011}}</ref> a notion supported by others, such as [[Scott Sumner]].<ref>{{cite web|last=Sumner|first=Scott|author-link=Scott Sumner|title=The other money illusion|url=http://www.themoneyillusion.com/?p=6937|date=11 September 2010|work=The Money Illusion website|access-date=3 June 2011}}</ref> [[U.S. Federal Reserve]] economists assert that the liquidity trap can explain low inflation in periods of vastly increased central bank money supply. Based on experience $3.5 trillion of [[quantitative easing]] from 2009β2013, the hypothesis is that investors hoard and do not spend the increased money because the [[opportunity cost]] of holding cash (namely the interest forgone) is zero when the nominal interest rate is zero.<ref>{{cite web|url=https://www.stlouisfed.org/publications/regional-economist/april-2014/the-liquidity-trap-an-alternative-explanation-for-todays-low-inflation|website=St. Louis Federal Reserve|author1=Maria A. Arias|author2=Yi Wen|title=The Liquidity Trap: An Alternative Explanation for Today's Low Inflation|date=April 1, 2014|accessdate=October 25, 2021}}</ref> This hoarding effect is purported to have reduced consequential inflation to half of what would be expected directly from the increase in the money supply, based on statistics from the expansive years. They further assert that the liquidity trap is possible only when the economy is in deep [[recession]].
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