Short Note- Liquidity Trap

 A liquidity trap may be a situation, described in Keynesian economics, in which, "after the speed of interest has fallen to a particular level, liquidity preference may become virtually absolute in the sense that nearly everyone prefers holding cash instead of holding a debt which yields so low a rate of interest.”

A liquidity trap is caused when people hoard cash because they expect an adverse event like deflation, insufficient aggregate demand, or war. Among the characteristics of a liquidity trap are interest rates that are on the brink of zero and changes within the funds that fail to translate into changes within the price level.

In Keynes' description of a liquidity trap, people simply don't want to carry bonds and like other, non-liquid sorts of money instead. Because of this preference, after converting bonds into cash, this causes an incidental but significant decrease to the bonds' prices and a subsequent increase to their yields.

However, people prefer cash regardless of how high these yields are or how high the financial institution sets the bond's rates (yields).

Post-Keynesian economist Hyman Minsky posited that "after a debt deflation that induces a deep depression, an increase in the money supply with a fixed head count of other assets may not lead to a rise in the price of other assets." This naturally causes interest rates on assets that are not considered "almost perfectly liquid" to rise.