economics noob here needing help
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hi all hardworking students
i hope some of ya can help me with my economics
using simple layman terms.. could anyone explain the cause and effects of
"liquidity trap"
best with a graph drawn or simple mathematics formula
thx a million
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If i can recall by memory...
It occurs when Nir is around/equal to zero and when any monetary policies (Keynesian or Classical) could not make it stable. Therefore, people want their assets to be more liquid or viable and make a firesale on all their fixed assets such as property or land and keep them as ST assets (e.g liquid assets).
So therefore, when a situation like that happens, it may aggravate the existing recession and even when the Central Bank or other Monetary Authority decides to help (either by cash injection, reduce leakages or increase borrowing and lending), they could not help to change the existing NIR..Thus, this becomes a liquidity trap when banks are not willing at all to lend because of the deproving interest rate...
Hope it's accurate
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Simply speaking, the liquidity trap belongs to the keynesian class of thoughts.
Interest rates can be seen as the price of holding $$, assuming people can hold their wealth either as cash or bonds.
In the keynesian theory, the demand for $$ intersection point with the supply of $$ leads to the corresponding interest rate. According to this theory, the demand curve becomes perfectly elastic.
That perfectly elastic portion of the demand for $$ is the liquidity trap.
Apparently, by theory, Keynes believed that there is a minimum interest rate that can exist. Because if interest rates fall to this level, then the returns from purchasing bonds will not cover the cost and risk of holding them. Note that the risk of holding bonds, especially long-term bonds include the risk of falling interest rates which implies an increasing opportunity costs for holding such bonds.
As such, people would rather hold their wealth entirely in cash and hold their breath, hence the demand for $$ becomes perfectly elastic as people wait for something to happen.
This is the theory of the liquidity trap. Real-life examples would include Japan. The effects of such a trap is that using the supply side of $$ in an attempt to control interest rates become useless, implying that monetary policies become virtually hapless.
That's as much as I know.
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so in wad way can we solve 'liquidity trap'??
increasing Nir?
by wad ways?
any graphs?
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You got no notes on this??
If you have it, its much easier for me.
But as you should know, by theory, manipulating the demand and supply of $$ should do the trick.
But the thing about the trap is that you would need to take vast amounts of $$ out of the circulation and that is the headache. You don't have to be inside the trap for that, near that point is enough.
So you can imagine what happened to Japan during the 90s.
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i was told if government or citizens spend more domestically.. the situation will become better.. but i'm using IS-LM graphs, can't understand abt yur manipulating of demand and supply.
mind using more layman's term?? maybe a story etc
like erm.. liquity trap occurres when national interest rate is close to zero..
put $100 in bank get $101 next year only.. therefore noone really wan invest or keep $$ in bank
therefore even if central bank borrow or lend or print or burn $$ it couldn't help the economy cos ppl just wanna hold liquid cash and put under their pillows
pls correct me if i'm wrong lol
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i reckon its more to your MP curve
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Sorry....but what's IS-LM? lol
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Originally posted by 16/f/lonely:
Simply speaking, the liquidity trap belongs to the keynesian class of thoughts.
Interest rates can be seen as the price of holding $$, assuming people can hold their wealth either as cash or bonds.
In the keynesian theory, the demand for $$ intersection point with the supply of $$ leads to the corresponding interest rate. According to this theory, the demand curve becomes perfectly elastic.
That perfectly elastic portion of the demand for $$ is the liquidity trap.
Apparently, by theory, Keynes believed that there is a minimum interest rate that can exist. Because if interest rates fall to this level, then the returns from purchasing bonds will not cover the cost and risk of holding them. Note that the risk of holding bonds, especially long-term bonds include the risk of falling interest rates which implies an increasing opportunity costs for holding such bonds.
As such, people would rather hold their wealth entirely in cash and hold their breath, hence the demand for $$ becomes perfectly elastic as people wait for something to happen.
This is the theory of the liquidity trap. Real-life examples would include Japan. The effects of such a trap is that using the supply side of $$ in an attempt to control interest rates become useless, implying that monetary policies become virtually hapless.
That's as much as I know.
clap clap clap
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Originally posted by starhawk:
i was told if government or citizens spend more domestically.. the situation will become better.. but i'm using IS-LM graphs, can't understand abt yur manipulating of demand and supply.
mind using more layman's term?? maybe a story etc
like erm.. liquity trap occurres when national interest rate is close to zero..
put $100 in bank get $101 next year only.. therefore noone really wan invest or keep $$ in bank
therefore even if central bank borrow or lend or print or burn $$ it couldn't help the economy cos ppl just wanna hold liquid cash and put under their pillows
pls correct me if i'm wrong lol
Correct. So to put it more cheemly, bonds are instruments to earn $$, I mean, who doesn't want to earn more dough?
So if the bonds, which earns you $$ according to the prevailing interest rates can't earn you enough for your satisfaction, obviously you won't put your $$ on something that earns you nuts. So you hold your $$ under your pillow like you say, and wait for interest rates to go up.
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Originally posted by 16/f/lonely:
Sorry....but what's IS-LM? lol
IS is Investment and SavingsLM is Liquidity and Money Supply
Basically, ISLM is used to find out the aggregate demand and how much monetary policies affect the economy..
How could u not know since ISLM model is an integral part of Keynesian
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IS-LM is the curves that brings about yur aggregate demand curves.. the goods market and the money market combine power 
IS = goods market
LM= money market
now i know the cause and effect, next the most important thingy
HOW to solve or get out of liquidity trap??
but in layman's term pls..
i have notes.. but all in economics termology
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Originally posted by starhawk: IS-LM is the curves that brings about yur aggregate demand curves.. the goods market and the money market combine power
IS = goods market
LM= money market
now i know the cause and effect, next the most important thingy
HOW to solve or get out of liquidity trap??
but in layman's term pls..
i have notes.. but all in economics termology
I seriously never heard of IS-LM....lol
To solve the liquidity trap, like I said, you manipulate the demand, supply curves.
So I repeat, haha, if you look at the graph carefully, there must be a huge movement in your curves to make any significant impact on interest rates. That impairs any monetary policy you would want to use.
Thus said, to manipulate your supply side, you have to control the circulation of cash. For the demand side, you can set your bond prices accordingly. Bond prices and interest rates share an inverse relationship that is crucial in your understanding for this topic.
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but how u manipulate demand curves??
supply curves i can understand if country's production increase..
but how to increase all ppl's demand for goods at almost the same time??
maybe u can use stories or examples like wad i do just now??
thx babe
u the chioest
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babe?
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Please don't suck up to my arse....please!! lol
Ok.....the demand for $$, according to Keynes, consists of transaction, precautionary and speculative demand.
Transaction demand = Demand for $$ to tide you by day-to-day, as a lay-man definition. That means how much you desire to hold $$ for your daily uses.
Precautionary demand, I no need to say so much, is the demand for $$ for rainy days. This amount varies, you can expect the ill, the elderly and pessimistic people to hold more. The last is particularly important. If people believe Chee Soon Juan is gonna become our PM, they'll start stashing $$.
Speculative demand is more complex. It is the demand for $$ to make moves in the bond market. In other words, this demand is of particular importance here. Why the demand curve slopes is because the demand for $$ for speculating is inversely proportional to interest rates.
Why?
As interest rates go up, you must be a goondu to hold your $$ in your pillow while everyone earns $$ buying bonds and receiving the subsequent regular pay-outs tagged to that interest rate.
2ndly, the expectation of interest rates. When it is high, people will expect it to fall, so people will start cutting their speculative demand bcos they think they won't earn much in the future. The converse holds true.
So....after such a long story, you should be able to see what would affect the demand for $$.
Example, your income goes up, naturally your transaction demand will go up as you start buying Maseratis.
Thus said, how do you start by increasing incomes? That's a even longer story.
Hence, supply side policies are preferred as supply of $$ is easier to manipulate. To explain how to manipulate the circulation of flow will cut into my sleep-time though...
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16/f mah
ok maybe yandao kia
lai help
maurizio13 lai help..
i know u graph expert in the politics forum
quote any examples..
real life also can
or simple stories
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Hanor hanor....maurizo please enlighten me also...
You is chioest too.
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omg!!!
you are going to get an extremely rude shock when you date "her".
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Originally posted by maurizio13:
omg!!!
you are going to get an extremely rude shock when you date "her".
Oi....don't sexpose me... -
i understand yur meaning..
the cause and effects i know liao
but now is the solving part
wad can policy can drag us out of liquidity trap
i lack tat part only
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Originally posted by starhawk:
16/f mah
ok maybe yandao kia
lai help
maurizio13 lai help..
i know u graph expert in the politics forum
quote any examples..
real life also can
or simple stories
nobody recognise my contributions
saddening sia
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Originally posted by Master -_-:
nobody recognise my contributions
saddening sia
Yours is the practical part which I have no sexperience leh....too cheem for me! -
I basically just listed all the factors of demand for $$.....use them wisely....lol
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Originally posted by Master -_-:
nobody recognise my contributions
saddening sia
save me Master -_-u leng zai