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Liquidity trap
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{{short description|Situation described in Keynesian economics}} {{Macroeconomics sidebar}} A '''liquidity trap''' is a situation, described in [[Keynesian economics]], in which, "after the [[rate of interest]] has fallen to a certain level, [[liquidity preference]] may become virtually absolute in the sense that almost everyone prefers holding [[cash]] rather than holding a debt ([[financial instrument]]) which yields so low a rate of interest."<ref name=keynes1>[[John Maynard Keynes|Keynes, John Maynard]] (1936) ''[[The General Theory of Employment, Interest and Money]]'', United Kingdom: Palgrave Macmillan, 2007 edition, {{ISBN|978-0-230-00476-4}}</ref> A liquidity trap is caused when people hold cash because they [[Expectation (epistemic)|expect]] an adverse event such as [[deflation]], insufficient [[aggregate demand]], or [[war]]. Among the characteristics of a liquidity trap are interest rates that are close to [[zero lower bound]] and changes in the [[money supply]] that fail to translate into changes in [[inflation]].<ref name=back>[[Paul R. Krugman|Krugman, Paul R.]] (1998) [http://www.brookings.edu/~/media/projects/bpea/1998%202/1998b_bpea_krugman_dominquez_rogoff.pdf "It's baack: Japan's Slump and the Return of the Liquidity Trap,"] {{webarchive|url=https://web.archive.org/web/20130524193008/http://www.brookings.edu/~/media/Projects/BPEA/1998%202/1998b_bpea_krugman_dominquez_rogoff.PDF |date=24 May 2013 }} [[Brookings Institution|Brookings]] Papers on Economic Activity</ref>
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