Economics
This query is : Resolved
07 February 2016
Please let me know about the concept of ''Liquidity Trap''
what is the real meaning of this???
what is the real meaning of this???
07 February 2016
Liquidity Trap is a situation defined in Keynesian Economic Theory in which:
- Central Bank's injections of Cash into private banking system
- Fails to decrease the interest rates.
- This is mainly on account of hoarding of cash by people
- expecting an adverse event like deflation, insufficient demand or war.
- The important feature of this concept is the interest rates near to zero, which makes monetary policy ineffective.
In this situation even a zero interest rate is insufficiently low to produce full employment. People do not expect high returns on physical or financial investments, so they keep assets in short-term cash bank accounts or hoards rather than making long-term investments. This makes the recession even more severe. Japan is the current example of Liquidity Trap.
- Central Bank's injections of Cash into private banking system
- Fails to decrease the interest rates.
- This is mainly on account of hoarding of cash by people
- expecting an adverse event like deflation, insufficient demand or war.
- The important feature of this concept is the interest rates near to zero, which makes monetary policy ineffective.
In this situation even a zero interest rate is insufficiently low to produce full employment. People do not expect high returns on physical or financial investments, so they keep assets in short-term cash bank accounts or hoards rather than making long-term investments. This makes the recession even more severe. Japan is the current example of Liquidity Trap.
07 February 2016
Thank you shashank, but in your explanation you said about the ''zero interest rates'', kindly clear the image on this.
07 February 2016
It means Central Bank Nominal Interest Rates equals or close to zero.
In Such a scenario, the short term deposits will not fetch any interest, or say, the rate of interest would be zero.
In some extreme cases, like currently in Japan, there might be negative rates. It means you will actually have to pay interest on the money you keep as a deposit in a bank. Yes, you read it right, you will be paying an interest on your FDs.
In Such a scenario, the short term deposits will not fetch any interest, or say, the rate of interest would be zero.
In some extreme cases, like currently in Japan, there might be negative rates. It means you will actually have to pay interest on the money you keep as a deposit in a bank. Yes, you read it right, you will be paying an interest on your FDs.
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- Refund Annexure-B
- House Property Reporting in ITR
- TDS Claim year
- Liable to deduct tds and 44ADA
- TDS Challan Code
- Refund of 20%pre-deposit paid for stay application
- Nomination of Bank for refund in itr 2
- Section 56(2) of the Income tax Act 1961 , Gift to relative .
- Rent lease agreement
- Merchant Export Accounting
- Internship/Academic shown in Salary Pay Slip of a Doctor
- E Commerce GSTR1 & 3B how to file
- GST Cancellation without jurisdiction
- Legal Opinion on Registrar's Refusal to Investigate a Society for Non-Renewal and Non-Compliance
- GST Refund_RFD-01
- Form10BD was uploaded successfully without any Error but after 24 hours, Form10BE are not available
- Annexure B utility for GST Refund
- Tax amount diff in Gstr1 and 3B in tax compare reports
- Tds on GST in connection with sale to public company
- Restoration of certificate of practice
Trending Online Classes
-
DT & Audit (Exam Oriented Fastrack Batch) - For May 26 Exams and onwards Full English
CA Bhanwar Borana & CA Shubham Keswani
CAclubindia
