You’ll probably start to hear the term, liquidity trap, soon. It’s not just for college economic students anymore.

One of the great tools the government has to manage the economy is the interest rate. If the government lowers the interest rate, people spend more money which stimulates the economy.

Unfortunately, as the rate gets lower, the effect of an interest rate cut becomes less. That is, cutting the rate from 2% to 1.5% has much less effect that cutting the rate from 5% to 4.5%.

When interest rates get very low indeed, one of our best economic tools loses it’s ability to stimulate the economy.

The Liquidity Trap.

In a related matter;

In a move to boost economic growth in the midst of a worsening global financial crisis, the Federal Reserve lowered its fed funds rate by half a percentage point to 1.5%.