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Liquidity Trap

By Mike Moffatt, About.com

Definition: The Liquidity trap is a Keynesian idea. When expected returns from investments in securities or real plant and equipment are low, investment falls, a recession begins, and cash holdings in banks rise. People and businesses then continue to hold cash because they expect spending and investment to be low. This is a self-fulfilling trap.

See also: Keynes Effect and Pigou Effect.

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