Terms Beginning With 'l'

Liquidity Trap

  • January 29, 2020
  • Team Kalkine

It is a condition in which savings rates are elevated, and interest rates are at a low level, rendering no effect in the monetary policy. In this trap, people decide to avoid bonds and retain their funds in savings, with the belief that soon the interest rates might increase.

In other words, the liquidity trap occurs when the consumers hoard money due to the probability of an adverse event like war, insufficient aggregate demand and deflation.

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