What is Liquidity Preference Theory Definition ?
According to many economist liquidity preference theory of interest has defined barely a money development and additionally give up of money.
Liquidity preference theory described investors to demand more interest rate or premium over securities.
Liquidity preference theory is given by John Manyard Keynes's (famous economist).
According to keynes's liquidity preference theory indicates that the demand for money not just borrow money. It is basically to remain liquidity.
According to liquidity preference theory in the other words liquidity preference theory explained about interest rate is just for money. Keynes told in his liquidity preference theory that interest always determined by according to demand and supply for money.
One question arises definition of liquidity preference theory?
According to liquidity preference theory
Model that force the capitalist ought to demand higher rate of interest in terms of longer maturity outlined in liquidity preference theory that carry bigger risk.
Price is not associated interests for the sacrifice of waiting or time preference exept for parting with liquidity.
Consider the liquidity preference theory of the term structure of rate inside the determination of the interest rate.
This liquidity preference theory is called as liquidity preference theory of intreast.
Liquidity preference theory take into account as - motive of liquidity preference theory
Criticism of liquidity preference theory of interest
- Indeterminate of just like Keynes liquidity preference theory is indeterminate as comparison to classical theory of interest rate. According to Keynes theory of liquidity preference velocity move up and down with increase and decrease of the level of income.
- Liquidity preference theory criticized on the ground of its narrow explanation of rate of interest. Rate of interest intreast further depend on three factors like rate of savings, propensity to consume and marginal efficiency of capital or money.
- Many economist argued that it's not properly hoarding ideas are explained in liquidity preference theory.
- Keynes thought it very easy to make difference between liquidity and illiquidity. But it is not very easy task to make distinction between liquidity and illiquidity in many cases.
Speculative motive of liquidity preference theory
Transaction motive relative to the demand for cash or would like for money for the present dealings of people and businessmen.
Individual wish to carry make the most order to bridge the interval between receipt of financial gain and it's expenditure.
The buisness and conjointly the entrepreneurs even have to be compelled to keep a proportion of their resources in cash current would really like assorted sots.
People hold an exact quantity of cash to produce for the danger of state, sickness and also the different unsure emergencies.
Here are the main criticism of liquidity preference theory are discussed:-
The speculative motive relative to need the will the need to desire to carry one's resources in liquidity from as to require advantage of market movement concerning the longer term amendment within the rate of interest.