This is an important factor which is very important in mapping the liquidity curve. Equation (6) is the most important in the model since it incorporates the idea of liquidity preference. It is the basis of a theory in economics known as the liquidity preference theory. Introduction iquidity preference theory was developed by eynes during the early 193 ’s following the great depression with persistent unemployment for which the quantity theory of money has no answer to economic problems in the society Jhingan (2004). Everyone in this world likes to have money with him for a number of purposes. Merits of Keynes’s Liquidity-Preference Theory: Keynes’s liquidity-preference theory has some distinct merits over the classical theory. liquidity preference is the relevant theory of interest. This constitutes his demand for money to hold. 2. Liquidity Preference refers to the additional premium which holders of wealth or investors will require in order to trade off cash and cash equivalents in exchange for those assets that are not so liquid. Liquidity refers to how easily an investment can be sold for cash. Money commands universal acceptability. b. short run and supposes that the interest rate adjusts to bring money supply and money demand into balance. Introduction Loanable funds theory, liquidity preference theory, the IS/LM model’s determination of the interest rate, and the more recent general equilibrium-based models of interest rate determination, together share the role of interest rate theory in the economics curriculum. c. Liquidity refers to the convenience of holding cash. Liquidity preference theory is most relevant to the a. short run and supposes that the price level adjusts to bring money supply and money demand into balance. This theory is an extension of the Pure Expectation Theory. It adds a premium called liquidity premium Liquidity Premium A liquidity premium compensates investors for investing in securities with low liquidity. It ought into spotlight the role of money in the determination of the rate of interest. These merits are as follows: Firstly, Keynes’s theory is a monetary rather than a real theory. Tutorial Review Questions Chapter 15 MULTIPLE CHOICE 1. Liquidity Preference Theory. Liquidity means shift ability without loss. Moggridge … Money is the most liquid assets. According to this theory, the rate of interest is the payment for parting with liquidity. 7) liquidity preference theory is most relevant to the b. short run and supposes that the interest rate adjusts to bring money supply and money demand into balance 8)people choose to hold a smaller quantity of money if The Liquidity Preference Theory was propounded by the Late Lord J. M. Keynes. But they have not followed the theory through to the debt management conclusions that Keynes drew. Among these might be government bonds, stocks, or real estate.. Key words: refinement, liquidity, preference theory, proposition, Keynesian model. It refers to easy convertibility. Everybody likes to hold assets in form of cash money. The liquidity preference theory of interest explained. Monetary policy can be described either in terms of the money supply or in terms of the interest rate. The theory of liquidity preference is indeterminate or unspecified as it fails to consider the different levels of income. Narrow Version: The theory provides little explanation on its influence on rate of interest. Liquidity preference theory is most relevant to the short run and supposes that the interest rate adjusts to bring money supply and money demand into equilibrium. It should also be noted that economic historians have not entirely neglected Keynes's monetary policy.
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