The liquidity trap occurs when interest rates fall and savings increase, which does not increase the money supply. In this situation, people prefer to keep their savings in cash instead of investing, resulting in a shortage of liquidity in the market.
Reasons for liquidity:
Liquidity traps usually appear after a period of financial crisis or economic downturn. People tend to save in times like these and prefer to keep their savings in cash and be cautious with loans.
The problem occurs most often when, despite the presence of money in the market, the investment cannot be increased in cost or volume.