Liquidity trap

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Liquidity trap is a situation in which prevailing interest rates are low and savings rates are high, making monetary policy ineffective. In a liquidity trap, consumers choose to avoid bonds and keep their funds in savings because of the prevailing belief that interest rates will soon rise. Because bonds have an inverse relationship to interest rates, many consumers do not want to hold an asset with a price that is expected to decline. [Source: http://www.investopedia.com/terms/l/liquiditytrap.asp]



Sayed Farrukh Ahmed
Assistant Professor
Faculty of Business & Economics
Daffodil International University