a) People want to hold only cash because prices are falling everyday
b) People want to hold only cash because there is too much of liquidity in the economy
c) The rate of interest is so low that no one wants to hold interest bearing assets and people wants to hold cash
d) There is an excess of foreign exchange reserves in the economy leading to excess money supply
b) People want to hold only cash because there is too much of liquidity in the economy
c) The rate of interest is so low that no one wants to hold interest bearing assets and people wants to hold cash
d) There is an excess of foreign exchange reserves in the economy leading to excess money supply
Ans- c
Explanation-The liquidity trap is the situation in which prevailing interest rates are low and savings rates are high.Public choose to avoid bonds , making monetary policy ineffective.All this happen under apprehension of belief that interest rates will increase. In liquidity trap public do not want to hold an asset with a price that is expected to decline.
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