liquidity preference theory

Liquidity preference theory, proposed by economist John Maynard Keynes, suggests that individuals prefer to hold their wealth in liquid forms, like cash, rather than in less liquid assets, such as stocks or real estate. This preference is influenced by three main motives: the need for transactions, precaution against unexpected expenses, and the desire for investment opportunities. Essentially, people value having immediate access to their money, which can lead to variations in interest rates. If many prefer liquidity, demand for cash increases, potentially raising interest rates as lenders seek compensation for tying up their resources.