Q.What is meant by liquidity preference?

Keynes explained interest through people's desire to hold cash rather than less liquid assets, and this desire is what he called liquidity preference. …

Liquidity preference, a term introduced by J.M. Keynes, refers to the demand for money -- people's desire to keep a part of their wealth as ready cash rather than in a less liquid form such as a bond or a fixed deposit. Keynes identified three motives behind this demand: the transactions motive (cash needed for everyday spending), the precautionary motive (cash kept aside for unforeseen expenses), and the speculative motive (cash held in anticipation of a fall in bond prices or a rise in interest rates). In Keynes's theory, the rate of interest is determined where this demand for money, i.e. liquidity preference, equals the s …

Liquidity preference is sometimes confused with 'saving' -- it is specifically about the form in which wealth is held (cash versus bonds …