The Reds exited the competition on Thursday and currently sit 10 points adrift of City in the Premier League table, a sight most fans on Merseyside would rather not picture.
However, a contrast in form and expectations have resulted in a rather different mood heading into the encounter and Carragher believes that his former team have a psychological edge.
“City should be in a better state physically, having had an extra couple of days to prepare, but mentally it could be a very different matter,” he told Sky Sports.
“The message from Rodgers and his staff will be: 'We've got to get into the top four another way now and going out of Europe gives us a better chance.'
“The Europa League isn't as prestigious as the Champions League so Liverpool should be able to shake off the disappointment more quickly.
“City might not have gone out of the top club competition just yet but in the back of their minds, they'll know how close they are.
“You build yourself up all season for the Champions League and when you're seen as one of the top clubs it's a massive blow to be on the brink.”
Are Liverpool in better shape mentally heading into the game?
Brendan Rodgers’s men exited the Europa League on Thursday night following a 5-4 penalty shootout loss against Turkish side Besiktas after being held to a 1-1 aggregate score in the round of 32.
In most cases, an exit from Europe could hamper morale, but on this occasion it could prove to be a good thing as now the Merseysiders can focus entirely on their push for a top-four finish in the Premier League plus the FA Cup.
The Citizens, in contrast, are all but assured of Champions League qualification next season, but their primary aims are to retain the Premier League title and make huge strides in Europe.
Yet, City currently sit five points behind Chelsea in second place and face a quick European exit after suffering a 2-1 defeat at home to La Liga giants Barcelona in the first leg of their last-16 tie.
Expectations and mood are extremely relevant, and after last season’s double success and subsequent boost in potential, one can only suggest that City have been rather disappointing so far this campaign.