Here Is What A Liquidity Trap Is Explained In Its Simplest Form And In One Paragraph | Exploring Markets

Here Is What A Liquidity Trap Is Explained In Its Simplest Form And In One Paragraph

The Liquidity Trap :
"A liquidity trap occurs when the nominal interest rate is close or equal to zero, and the monetary authority is unable to stimulate the economy with traditional monetary policy tools. In this kind of situation, people do not expect high returns on physical or financial investments, so they keep assets in short-term cash bank accounts or hoards rather than making long-term investments. This makes a recession even more severe, and can contribute to deflation."