A Liquidity Trap is an economic situation where people hoard money instead of investing or spending it. As a result, a nation’s central bank can’t use expansionary monetary policy to boost economic growth.When people are worried about the future, they tend to save more and spend less. This decrease in spending can lead to lower production and fewer jobs – causing a downward spiral in the economy. A liquidity trap is often caused by a lack of confidence in the government or financial system.The only way out of a liquidity trap is for people to start spending again. This can be difficult to achieve, but it’s essential for economic growth. The government can help by providing incentives for investment and consumption, such as tax breaks or subsidies.
