Answer to Question #93953 in Macroeconomics for Mampho

Question

The theory of the demand for money is based on John Keynes’ Liquidity Preference Theory.
Give your own detailed explanation of liquidity preference theory and how the demand for money curve is determined. Illustrate your answer graphically.
Note: You should include in your answer a detailed explanation of each component of the demand for money as well as the determinants of these components.

Answer 1

Liquidity preference theory suggests that an investor demands a higher interest rate or premium on securities with long-term maturities that carry greater risk because, all other factors being equal, investors prefer cash or other highly liquid holdings.