Q. Which of the following statements regarding ‘Liquidity Trap’ is/are correct?

1. It occurs when interest rates are already near zero and monetary policy becomes ineffective.
2. Under a liquidity trap, people prefer holding money rather than investing in bonds.
3. The concept was first explained by Milton Friedman in the 1980s.

Select the correct option from the codes given below:
Answer: Only 1 and 2
Notes: A liquidity trap occurs when interest rates are already near zero and monetary policy becomes ineffective, and people prefer to hold money over bonds. The concept was introduced by John Maynard Keynes in the 1930s and not Milton Friedman, who is known for Monetarism. Therefore, statements 1 and 2 are correct, while statement 3 is incorrect.