Economics • Economic BasicsMedium
What is meant by 'Liquidity Preference' as introduced by John Maynard Keynes in his General Theory?
A. The desire of investors to hold long-term government bonds instead of equities.
B. The demand for holding liquid assets (cash) rather than illiquid assets, driven by transaction, precautionary, and speculative motives.✓ Correct Answer
C. The rate at which commercial banks borrow funds from the central bank overnight.
D. The preference of foreign investors for holding domestic currency during periods of hyperinflation.
💡 Solution & Explanation
John Maynard Keynes introduced the liquidity preference theory in his General Theory of Employment, Interest and Money to explain the demand for holding money. According to this framework, individuals hold liquid cash rather than earning assets to satisfy three primary motives: transaction, precautionary, and speculative. People need cash for everyday purchases, unforeseen emergencies, and to take advantage of future shifts in bond prices or interest rates. This theory forms the cornerstone of Keynesian monetary economics and is essential for understanding IS-LM models in macroeconomics.
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