liquidity preference curve

The liquidity preference curve shows how people’s demand for cash or easily accessible funds changes with interest rates. When interest rates are low, holding cash is less costly, so people prefer to keep more cash on hand. As interest rates rise, the opportunity cost of holding cash increases (since they could earn more elsewhere), leading to a decrease in cash holdings. This inverse relationship creates the downward-sloping liquidity preference curve, illustrating how the demand for liquidity varies with interest rates in the economy.