Note 1-81

(81) This relates to the problem of whether the economy is in a "liquidity trap" or not. If "liquidity trap" is defined as a situation where an increase in money supply is absorbed by an increase in money demand and therefore does not bring down interest rates, it can be said that the economy is in a "liquidity trap." However, if it is defined as a situation where monetary policy is ineffective, it cannot be said that the economy is in a "liquidity trap," as we can expect the effect of "portfolio rebalancing" as will be described below.