what is a liquidity trap 
a liquidity trap happens when individuals hold onto their money rather than spend or invest it people anticipate that prices will remain stagnant or fall so they prefer the safety of holding onto their money this can hamper efforts by central banks to boost economic activity it can also happen when yields fall so low that people hesitate to buy bonds as a result changes in the money supply have little effect on changing economic behavior leaving an economy stuck in a period of slow growth and low inflation or even deflation the bottom lineliquidity premium is the higher yield offered among similar investments for those that are less liquid the less liquid an investment is the harder it is to sell quickly for its fair market value and the greater its liquidity premium tends to be when considering liquidity it s essential to gauge whether the added return is worth the extra risk and limitations that less liquid investment options can have you can then more accurately assess the true costs and potential rewards of different investment options 