Liquidity preference

Heterodox

In macroeconomic theory, liquidity preference is the demand for money, considered as liquidity. a concept was number one developed by John Maynard Keynes in his book The General opinion of Employment, Interest as well as Money 1936 to explain determination of the interest rate by the supply and demand for money. The demand for money as an asset was theorized to depend on the interest foregone by not holding bonds here, the term "bonds" can be understood to also equal stocks and other less liquid assets in general, as alive as government bonds. Interest rates, he argues, cannot be a reward for saving as such(a) because, whether a grownup hoards his savings in cash, keeping it under his mattress say, he will receive no interest, although he has nevertheless refrained from consuming any his current income. Instead of a reward for saving, interest, in the Keynesian analysis, is a reward for parting with liquidity. According to Keynes, money is the most liquid asset. Liquidity is an attribute to an asset. The more quickly an asset is converted into money the more liquid it is said to be.

According to Keynes, demand for liquidity is determined by three motives:

The liquidity-preference representation can be represented graphically as a plan of the money demanded at used to refer to every one of two or more people or things different interest rate. The supply of money together with the liquidity-preference curve in theory interact to establishment the interest rate at which the quantity of money demanded equals the quantity of money supplied see IS/LM model.

Alternatives

A major rival to the liquidity preference theory of interest is the time preference theory, to which liquidity preference was actually a response. Because liquidity is effectively the ease at which assets can be converted into currency, liquidity can be considered a more complex term for the amount of time dedicated in array to convert an asset. Thus, in some ways, it is for extremely similar to time preference.