Economics • Economic BasicsMedium
Which of the following describes the condition of 'Liquidity Preference' as formulated by John Maynard Keynes?
A. The desire of investors to hold long-term government bonds over equities during high inflation
B. The demand for holding liquid assets (cash) rather than illiquid assets, driven by transactions, precautionary, and speculative motives✓ Correct Answer
C. The tendency of commercial banks to maintain excess reserves above the statutory requirements during economic expansions
D. The preference of central banks to use open market operations exclusively to control short-term interest rates
💡 Solution & Explanation
Liquidity preference theory posits that individuals demand cash and liquid holdings over illiquid bonds based on transactions, precautionary, and speculative motives. This Keynesian formulation rejects classical assumptions by linking money demand directly to income and interest rate fluctuations.
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