Más contenido relacionado


Liquidity preference theory

  1. Welcome to the Presentation Topics Name Liquidity Preference Theory Group Name The 'Dominators'
  2. Liquidity Preference Theory Propounded by John Maynard Keynes in his book The General Theory of Employment, Interest and Money (1936)
  3. What is Liquidity ▶ Liquidity is the mobility of assets whenever it is required. ▶ Can be termed as immediately spendable cash ▶ The amount of money that is readily available for investment and spending. ▶ It is the factor of supply and demand for a security or instrument and is affected by the size of the original issue and the time since the original issue. (most important)
  4. Liquidity Preference • People usually prefer present consumption unless they find it beneficial in the future. • Higher cost of living mean higher demand for cash • Cash is considered the standard for liquidity
  5. Motives that determine demand for liquidity 1. Transaction motive arises as people have to spend for their daily necessaries. 2. Precautionary motive is that people need money in case of social unexpected problems occur or may occur. 3. Speculative motive is the future oriented motive for which people retained liquidity so that they can earn. =f(Y) =f(r)
  6. Theory implications The theory implies that investors generally demand higher rate of interest for long term securities than that of short-term maturity. The speculative demand for money are the main determinant of interest rate in the economy if other things remain equal. Supply of money has impact on the interest rate determination. Government or monetary authority can increase or decrease interest rate by cutting down or boosting up money supply.
  7. Graphical presentation Liquidity trap m m1 LP Rate of interest m2 r r1 r2 a b c Money supply
  8. Shortcomings ✓ Indeterminate theory like the classical model as income changes may draw different liquidity preference schedules. ✓ The question of parting with liquidity arises only after we have saved money. If there are no saving, there is no parting with liquidity either. ✓ Keynes theory of interest is applicable only to advanced countries where money is widely in circulation and the money market is well organized. ✓ Keynes theory ignores productivity of capital. According to critics, interest is not only the reward for parting with liquidity but it arises due to productivity of capital. Had the capital not been productive, no one had demanded it and, hence, paid no interest on capital.
  9. We are glad to have you for the time being