Liquidity trap - Essay Example


Extract of sample
Liquidity trap

This creates is insufficient stimulation within the economy, as a result of hoarding of cash by the operators in the economy, with the anticipation of future economic occurrences that are not favorable to cash transactions, such as deflation, insufficient aggregate demand, or the uncontrollable events(Svensson, 1). The concept of liquidity trap will affect the banking sector in various ways. First, the coming into play of the concept of liquidity trap means that the interest rates will have to drop nearly to zero. Since this occurrence creates a scenario where the short-term interest rates are low, while the savings are very high, the banking sector will be affected by insufficient lending, which then means that the revenue generation capability of the banking sector will be low (Svensson, 2). Considering that when the interest rates are low the prices of the bonds is expected to drop in the near future, many consumers avoid utilizing their money to purchase the bonds, with the fear that such bonds will not bring in good returns, and instead opts to keep their money in savings, with an anticipation that the interest rates is going to increase in the near future (Svensson, 13). ...
Download paper


Name: Course: Date: How the banking sector may be affected by the “liquidity trap” The banking sector is a deposit taking sector, which heavily relies on the deposits taken from the customers of such financial institutions, to be able to perform some of its other functions such as lending (Svensson, 2)…
Author : xferry
Download 0



Related Essays

Business Economics
Euro crisis is supposed to result in negative growth for the next upcoming six months. Apart from US, the British are encountering the problem of double dip recession (Winnett, 2011). Currently OECD is giving warning to the US government about an emerging economic slowdown that the country might have to encounter soon. OECD claims to derive such a result from the composite index of the leading indicators. Such alerts have been issued for the seven major economies. It is mostly using CLI instrument to get early signals of downturn from the upswings and downswings within the periodical growth...
6 pages (1506 words) Essay
Managing Finance: Financial ratio analysis
In the last section of the paper we analyze how the firm should management its resources efficiently so as to achieve the optimal profit level. All this practices and analyses are undertaken so to manage the finances efficiently. Section A Financial ratio analysis: Ratio analysis helps in evaluating the financial soundness of the organization. In analyzing the financial statement of a company one can either carry out a trend analysis where he compares from the financial information of a company for certainty duration of time may be three years, while a cross sectional analysis is a comparison...
15 pages (3765 words) Coursework
Risk Measurement and Management: interest rate, liquidity and operational risk
It affects the value of bonds directly as compared to stocks thus a major risk to all bond holders. The increase in interest rate reduces the bond prices while their decrease inflates the bond prices. Therefore, as interest rate increase, the cost of holding a bond reduces because investor are able to recognize grater yields by opting to other investments that result into high interest rates(Allen, 2004). Interests’ rate risk may emerge as a result of basis risk, yield curve risk, repricing risks and optionality. Measurement These are instruments that help in detecting the level of interest...
12 pages (3012 words) Essay
Critically Evaluate why the Liquidity of a Firm is Considered Crucial Especially in the Growth Stage of a Company's Development.
Current paper focuses on a particular aspect of organizational performance: liquidity, a term used in order to show the potentials of an organization to meet its liabilities. Emphasis is given on the significance of liquidity in the growth stage of the company development. At the same time, efforts are made in order to identify the terms under which the changes in the financial statement of a particular organization can influence the organization’s value creation process. The literature published in regard to these issues has been reviewed and evaluated; it is made clear that the role of...
9 pages (2259 words) Essay
Current International Debt Crisis (Greece Crisis)
The countries had fallen into a debt trap and there was problem of cash crunch and liquidity crisis in the banking sector. Thus the Euro zone faced both fiscal and monetary policy problems along with a slowdown of the economies. The main reason behind this is the common monetary policy that these countries have owning to the adoption of the Euro currency across the entire zone but different fiscal policies for each of the countries. The countries of this zone had decided to limit their borrowings to a certain designated level but they could not restrict the borrowings to that level (Feldstein,...
4 pages (1004 words) Essay
the impact of the crisis
It has been found out that the cause that resulted in such a drastic financial condition was the excessive borrowing that the countries belonging to the Euro zone had undertaken. Adding on to this problem there was lack of competitiveness in specific countries of this zone which resulted in the imbalances in the trade of these countries and also an increase in the current account deficit. This led to a weakening of the financial condition of the banks and they had problems in getting any further funding. Hence the credit and cash crisis in the country set in. While in Greece the problem...
8 pages (2008 words) Essay
Summary on Trap Doors and Trojan Horses
Fraud can involve as little as $1 to millions of dollars depending on the players involved, as characterized by most fraud activities involving large corporations like banks and investment firms. Trap Doors and Trojan Horses is a book authored by Larry Crumbley, Lawrence Murphy Smith and Laura Davis DeLaune that details the intricacies of fraud involving large corporations and firms. The book is written as a novel that portrays what is regarded as mundane auditing or accounting process in an extremely creative and interesting manner that captures the reader’s attention. The technique used to...
5 pages (1255 words) Essay
Got a tricky question? Receive an answer from students like you! Try us!