Among these might be government bonds, stocks, or real estate.. 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. Narrow Version: The theory provides little explanation on its influence on rate of interest. It should also be noted that economic historians have not entirely neglected Keynes's monetary policy. Money is the most liquid assets. The liquidity preference theory of interest explained. It refers to easy convertibility. These merits are as follows: Firstly, Keynes’s theory is a monetary rather than a real theory. liquidity preference is the relevant theory of interest. 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. Monetary policy can be described either in terms of the money supply or in terms of the interest rate. 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 Liquidity means shift ability without loss. 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). Liquidity refers to how easily an investment can be sold for cash. Everybody likes to hold assets in form of cash money. The theory of liquidity preference is indeterminate or unspecified as it fails to consider the different levels of income. b. short run and supposes that the interest rate adjusts to bring money supply and money demand into balance. Everyone in this world likes to have money with him for a number of purposes. Key words: refinement, liquidity, preference theory, proposition, Keynesian model. Merits of Keynes’s Liquidity-Preference Theory: Keynes’s liquidity-preference theory has some distinct merits over the classical theory. Liquidity refers to the convenience of holding cash. The Liquidity Preference Theory was propounded by the Late Lord J. M. Keynes. 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. This constitutes his demand for money to hold. c. Liquidity Preference Theory. It is the basis of a theory in economics known as the liquidity preference theory. Moggridge … According to this theory, the rate of interest is the payment for parting with liquidity. Money commands universal acceptability. 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. But they have not followed the theory through to the debt management conclusions that Keynes drew. It ought into spotlight the role of money in the determination of the rate of interest. Equation (6) is the most important in the model since it incorporates the idea of liquidity preference. Tutorial Review Questions Chapter 15 MULTIPLE CHOICE 1. 2. This is an important factor which is very important in mapping the liquidity curve. 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. A number of purposes this is an important factor which is very important mapping. S theory is a monetary rather than a real theory distinct merits over the classical theory a... 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