If a liquidity trap exists,people are likely to be thinking that
A) bond prices are so low that they have nowhere to go but up; given this,now is a good time to be holding bonds.
B) bond prices are so high that they have nowhere to go but down; given this,it is better not to be holding bonds.
C) bond prices will soon rise so it is better to get out of bonds now.
D) interest rates will soon fall.

Question

Quizplus · Accepted Answer

In a liquidity trap, interest rates are so low that people are not inclined to borrow or invest even though rates are low. This results in high demand for safe assets such as bonds. Consequently, the prices of bonds rise, and their yields fall. Therefore, if a liquidity trap exists, bond prices are likely to be high and have nowhere to go but down. Hence it is better not to be holding bonds as their prices are expected to decline.

If a Liquidity Trap Exists,people Are Likely to Be Thinking