Liquidity Trap (redirected from Liquidity chrisis)

Liquidity Trap

A situation in which prevailing interest rates are low and savings rates are high. As a result, monetary policy is ineffective.

Notes:

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. Since bonds have an inverse relationship to interest rates, many consumers do not want to hold an asset whose price is expected to decline.

Should the regulatory committee try to stimulate the economy by increasing the money supply, there would be no effect on interest rates as people do not need to be encouraged further to hold additional cash.

See also: Federal Reserve System, Fiscal Policy, Interest Rate, Keynesian Economics, Liquidity, Liquidity Preference Theory, Monetary Policy, Money Supply