Liquidity trap is a situation in which ........

Indian Economy (Easy) Financial System

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Liquidity trap is a situation in which:

people want to hold only cash because prices are falling every day

people want to hold only cash because there is too much of liquidity in the economy

the rate of interest is so low that no one wants to hold interest bearing assets and people wants to hold cash

there is an excess of foreign exchange reserves in the economy leading to excess of money supply

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Explanation:

A liquidity trap is a situation when expansionary monetary policy (increase in the money supply) does not increase the interest rate, income and hence does not stimulate economic growth.
The liquidity trap is the extreme effect of monetary policy. It is a situation in which the general public is prepared to hold on to whatever amount of money is supplied, at a given rate of interest. They do so because of the fear of adverse events like deflation, war.