In this age of recession and shrinking world economies, governments, in a bid to increase aggregate demand (AD), may lower interest rates to encourage spending. This is because a lower interest rate makes spending relatively more attractive to consumers and businesses than saving in banks. When a government continues to lower interest rates repeatedly and they reach a level of 0% without correlated increase in AD, then it is called a liquidity trap.
Two prominent examples of liquidity trap in history are the Great Depression in the United States during the 1930s and the long economic slump in Japan during the late 1990s.
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