Liquidity Preference
What is Liquidity Preference?
Keynes's theory that interest rates are set by the demand for and supply of money.
Understanding Liquidity Preference
People hold money for transactions, as a precaution, and to wait for better investment opportunities. Holding money means giving up interest, so money demand falls as interest rates rise.
In Keynes's General Theory, the interest rate balances the desire to hold money (liquidity) with the money supply. It underlies the LM curve.