Q.What is the meaning of Liquidity Preference ?

Liquidity preference (J. M. Keynes) is the preference of people to keep wealth as cash rather than in illiquid forms; interest is the price paid to overcome this preference.

Money is the most liquid of all assets — it can be used instantly for any transaction. People generally prefer to hold cash instead of lending it or investing it in bonds because cash gives them convenience and safety. This desire to hold money in cash form is called liquidity preference.

Keynes identified three motives behind holding cash:

• Transactions motive — to meet day-to-day expenses.
• Precautionary motive — to meet unforeseen or emergency needs.
• Speculative motive — to take advantage of expected changes in bond prices / interest rates. …