Exams › SSC CGL (Prelims) › General

In the context of the Indian economy, ‘liquidity trap’ refers to a situation where:

1. Interest rates are very high
2. People prefer to hold cash despite low interest rates
3. Banks refuse to give loans to startups
4. Inflation is zero

Correct answer: People prefer to hold cash despite low interest rates

Solution

A liquidity trap occurs when interest rates are very low, but people still prefer holding cash instead of investing or spending. In such a case, monetary policy loses effectiveness. Therefore, the correct option is the one about preferring cash despite low interest rates.

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