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Question
What is 'Liquidity Trap'?
What is 'Liquidity Trap'?
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Solution
Liquidity Trap is a situation of a very low rate of interest in the economy where every economic agent expects the interest rate to rise in the future and consequently bond price falls, causing capital losses. Everyone holds her/his wealth in money and speculative demand for money is infinite.
Liquidity Trap is a situation of a very low rate of interest in the economy where every economic agent expects the interest rate to rise in the future and consequently bond price falls, causing capital losses. Everyone holds her/his wealth in money and speculative demand for money is infinite.
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