Which of Keynes's theories does liquidity preference refer to?
A)the effects of changes in money demand and supply on interest rates
B)the effects of changes in money demand and supply on exchange rates
C)the effects of wealth on expenditures
D)the difference between temporary and permanent changes in income

Question

Quizplus · Accepted Answer

Liquidity preference refers to Keynes's theory regarding the effect of changes in the demand and supply of money on interest rates. Keynes argued that people would prefer to hold liquid assets such as cash or short-term government bonds instead of non-liquid assets such as long-term government bonds when there is uncertainty about future events. This preference for liquidity can lead to changes in the demand for money and thus affect interest rates.

Which of Keynes's Theories Does Liquidity Preference Refer To