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Sagot :
Transactional motives, precautionary motives, and speculative motives, according to Keynes, determine the demand for liquidity. According to the theory, investments that are more liquid can be easily cashed in for their full value, while cash is the most commonly accepted liquid asset.
Keynes says that there are three reasons why people hold money (M) in cash: the transactions, as well as reasons for caution and speculation. The exchange thought process in holding cash is straightforwardly connected with the degree of in-come and connects with 'the requirement for cash for the ongoing exchanges for individual and business trade. '
In the liquidity preference theory of interest rate, why is money demanded?
According to Liquidity Preference Theory, an investor should demand a higher interest rate or premium on securities with long-term maturities that carry greater risk because investors prefer cash or other highly liquid holdings when all other factors are equal.
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