Q.State the meaning of liquidity preference.

Liquidity preference is Keynes's term for the demand for money — people's preference to keep wealth as cash rather than in illiquid assets — and interest is the price paid to make them give up that liquidity.

J.M. Keynes explained that money is the most liquid of all assets: it can be used instantly for any purpose. People therefore prefer to hold a part of their wealth as cash, and this preference for holding cash is called liquidity preference.

Keynes said people demand cash for three motives:

• Transactions motive — cash needed for day-to-day purchases.
• Precautionary motive — cash kept aside for unforeseen needs (illness, emergencies).
• Speculative motive — cash held to take advantage of expected changes in bond prices / interest rates. …

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. …