The theory of liquidity preference states that the interest rate adjusts to bring money supply and money demand into balance.

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The theory of liquidity preference, proposed by John Maynard Keynes, argues that the interest rate adjusts to balance the supply and demand for money. This occurs through the willingness of individuals to hold cash, which is determined by the rate of interest. If the interest rate is too high, people will choose to hold less cash and invest more, decreasing the demand for money and lowering the interest rate. Conversely, if the interest rate is too low, people will choose to hold onto more cash, increasing the demand for money and raising the interest rate. Therefore, the interest rate acts as a mechanism to bring money supply and demand into equilibrium, according to Keynes' theory of liquidity preference.

The Theory of Liquidity Preference States That the Interest Rate