Question

Discuss critically the following statement: “with uncertainty about Brexit, a global slowdown in growth, a central bank base rate of 0.75% and an environment which has excessively politicised the deficit and austerity, the UK Government and people should be petrified about falling into a liquidity trap.”

Answer 1

Liquidity trap takes place when decrease in interest rate fails to stimulate the borrowing and it makes monetary policy to be ineffective. Though , it happens when economy falls in the recession for a long period of time and households and firms have a gloomy outlook for the economy. In present scenario, Great Britain properly understands the risk and return associated with the BREXIT and it is the citizens who have mandated for the BREXIT, so they are eagerly waiting for it. further, global slowdown is there, but most of the major economies are coming out of it. It is already evaluated with the loss of business to the Great Britain due to BREXIT and the governments are already negotiating the trade relations with the Asian and American (north / south) nations to compensate the losses due to BREXIT. So, government is already preparing for it. Besides, there are gains also when there is a BREXIT in terms of better labor market conditions and getting free from the burden of carrying poor European countries. So, people should not be petrified from the aspects of liquidity trap, though there will be some economic setbacks. But, the government and people are already prepared for it.