Meaning of Liquidity Trap Graph

Speculative demand for money in which interest rates cannot fall further is called a liquidity trap. There is an inverse relationship between interest rate and speculative demand for money as a decrease in interest rate increases the speculative demand for money and an increase in interest rate decreases the speculative demand for money. But before the interest rate reaches zero, at one of the interest rates, the speculative demand for money demand curve becomes parallel to the horizontal axis, known as liquidity trap.

Liquidity Trap Graph

There is an inverse relationship between interest rate and speculative demand for money as a decrease in interest rate increases the speculative demand for money and an increase in interest rate decreases the speculative demand for money. Expressing this relationship through graphs is a liquidity trap graph. The concept of a liquidity trap graph relates to the speculative demand for money. The minimum interest rate is a liquidity trap graph if the elasticity of the demand curve for money is infinite.