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

Economic Affairs Money Supply and Monetary Policy

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‘Liquidity trap’ is a situation in which:

people want to hold only cash because prices are falling everyday

Monetary policy of the economy is unable to regulate the money supply in th market

tax rate is increased to withdraw excess money from the economy

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, described in Keynesian Economics, in which injections of cash into the private banking system by a central bank fail to decrease interest rates and hence make monetary policy ineffective.
The liquidity trap is the 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.