Finance and Economists Students in the house..
Pls I need an explanation on this definition..

A LIQUIDITY TRAP OCCURS IF PEOPLE WILL ABSORB ANY EXTRA-MONEY INTO IDLE BALANCES BECAUSE THEY ARE EXTREMELY PESSIMISTIC OR RISK AVERSE AND VIEW TRANSACTION COST AS PROHIBITIVE OR EXPECT THE PRICES OF NON-MONETARY ASSETS TO FALL IN THE NEAR FUTURE.

Where are the finance and economic students ooo, come out and answer ur question..

[b]Being liquid means having cash u can have access to now now.... Not ur assets worth or any other cash worth like fixed deposit, federal government bonds or other bonds ...

The trap their means a situation where a person or investor will prefer to be liquid I.e have cash in savings because savings interest rate will be or is higher than that interest rate of deposit....

Banks shift it as they desire based on the forces of demand and supply.


So as the demand for credit/loans is high, banks would need cash to meet up with the lending therefore increase the interest rate of fixed deposit and bonds
and reduce savings rate that will make u convert ur liquid cash to fixed that u won't have access to for some time say 90, 180 or 365 days meaning they can use it.

Whereas during lower demand for credit or loan and the bank is not in its lending season.... banks would reduce the interest rate on fixed deposit/bonds and increase savings rate to trap u, so that u willvwant to become liquid

Clearly more the interest rate more is the saving amount and vice versa.

My opinion though.....
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