Liquidity

Liquidity, in economics, is measure of people's willingness to spend for something.  If the thing seems expensive for them, they are unwilling to buy.  In barter economies, when there's a substantial price differential for something, there's inherently low liquidity.  For example if one person has a milk cow to trade and would like some dishes to eat from, some intermediate deal must be cooked up.  A milk cow can't be divided, so the only solution is to buy enough dishes to be a fair trade for the cow, and then try to find somebody else who wants your extra dishes.   Granular currency increases liquidity a great deal.  You can sell the cow for $500 and buy $100 worth of dishes.

There are other things that increase liquidity.  Having good roads makes the things transported by road cheaper.  Having policing, to keep you safe from bandits and fraudsters, does too.

Sometimes, something happens that changes the price of things.  The Arab oil embargo of the 1970s was such an event.  Saudi Arabia and a few others were angry at the unqualified US support for Israel during the Yom Kippur War of 1973, and punished the US by reducing our oil supply.  This caused the price of fuel to skyrocket and a series of recessions and inflation.

A recession is when there a broad reduction in liquidity for a lot of things.  Inflation is one way this can happen, but it's more often caused by some event that damages people's confidence. Keynes called this a change in "Liquidity Preference", meaning people prefer to save money rather than spend it on things.

The way out of recessions is to do what is necessary to create a broad based increase in liquidity.  When the problem is that the banks are scared--for example of unsound debts owed them--the bankers preference is to not lend.  This changes the liquidity of everything downward, so anything that presses liquidity upwards will help us out of the situation.   Since the bankers reticence results in making businesses afraid to a risk, the only remaining solution is for government to do it.  Government can do lots of things to increase liquidity.  Increasing the amount of money in circulation has an effect, but simply giving the banks more money to not lend is not especially helpful.  Buying up unsound loans would be much better: it reduces the thing the banks are scared of while putting money in bankers and homeowners hands.  Just doing stuff that gives people a paycheck is also very useful. Having money significantly increases their willingness to spend.  And if done wisely, so does things like build roads and educate people, which increases liquidity greatly downstream.