What is a liquidity trap?
A)When a company grows slowly because it focuses too much on liquidity
B)When apparent assets actually are a drain on the company, creating a cash flow problem
C)When there is not enough liquidity in a system, creating instability
D)When people with cash won't invest because they expect prices to fall

Question

Quizplus · Accepted Answer

A liquidity trap is when people who have cash won't invest because they expect prices to drop. These beliefs are often self-fulfilling because prices drop when no one is willing to buy. When there is a liquidity trap, injecting cash into the economy has no effect because people still do not want to invest.

What Is a Liquidity Trap