LIQUIDITY PREFERENCE THEORY

OF RATE OF INTEREST

PRESENTED BY
NABEELA TARIQ
ROLL NO.16CMB458
Research Methodology :

Type of data use : Secondary data

Sources of collection: Internet and different

books of economics

Purpose: B.Com 6th semester examination

Objectives of work :
 To find out meaning of Keynes theory
 To find out basic definition
 To understand motives behind Keynes theory
 To evaluate the significance of Keynes theory
 To examines the implications of Keynes theory
 To critically evaluate the Keynes theory
 Liquidity Preference theory of
Rate of Interest

Liquidity preference Theory of rate of interest propounded

by John Maynard Keynes in his book, “The General Theory
of Employment, Interest and Money”, according to him ,
“Interest is the reward for parting with liquidity for a
specified period.”
 Meaning of liquidity
Liquidity is the mobility of assets whenever it is
required can be term as immediately spendable
cash.

Meaning of liquidity preference

People usually prefer present consumption unless
they find it beneficial in future.Cash is considered
standard for liquidity.
Motives that determines demand
for liquidity
Transaction Precautionary Speculative
Motive Motive Motive
• Transaction motive • Precautionary • Speculative motive
relates to the motive for holding relates to the
demand for money money refers to the desire to hold
or need for cash for desire of people to one’s resources in
current transactions hold cash for liquid form in order
of individuals and unforeseen to take
businessmen. contengencies. advantages of
market movements
regarding the
future changes in
the rate of interest.
Graphical Presentation of Liquidity
Preference Theory
Significance :

 Interest is monetary phenomenon

 More generalized
 Integrated Theory
 Integration with price
 Inverse relationship between Interest and price
 Liquidity trap
 More practical
 Implications :

• Rate of interest and supply of money

• Expectations and the rate of interest

• Inverse relationship between rate of interest and bond price

• The liquidity trap

• Long term versus short term rate of interest

Criticism :

 No liquidity without saving

 Real factors ignored
 Interdeterminate
 Applicable to advanced countries
 Contradictory
 Time element ignored
 Hoarding
 Supply side ignored