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What is liquidity Trap ?

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It is a situation in which speculative demand for money becomes perfectly elastic. It is a situation of absolute liquidity preference. This term was coined by prof. J.M.Keynes. Liquidity appears at a very low rate of interest in which people prefer to hold cash rather than invest in bonds. The fear of loss due to minimum rate of interest may induce the public to refrain from further security purchases, the alternative is simply to hold the additional cash as an idle asset.

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