Question

In a liquidity trap, a small change in interest rate causes

Answer 1

In a liquidity trap, a small change in interest rate causes people to invest more of their money rather than hoard it.

This is because in a liquidity trap, interest rates become so low and saving rates are so high that it renders monetary policy ineffective. People prefer cash holdings rather than investing those in bonds.

To cure this, the central bank can try to raise the interest rates so that people invest more rather than hoard money. However, this is a possible solution which may not always work.