Liquidity preference theory is most relevant to the a. short run and supposes that the price level adjusts to bring money supply and money demand into balance. Everybody likes to hold assets in form of cash money. It refers to easy convertibility. Everyone in this world likes to have money with him for a number of purposes. The Liquidity Preference Theory was propounded by the Late Lord J. M. Keynes. c. Liquidity means shift ability without loss. 7) liquidity preference theory is most relevant to the b. short run and supposes that the interest rate adjusts to bring money supply and money demand into balance 8)people choose to hold a smaller quantity of money if This theory is an extension of the Pure Expectation Theory. Merits of Keynes’s Liquidity-Preference Theory: Keynes’s liquidity-preference theory has some distinct merits over the classical theory. Liquidity refers to how easily an investment can be sold for cash. 2. According to this theory, the rate of interest is the payment for parting with liquidity. Tutorial Review Questions Chapter 15 MULTIPLE CHOICE 1. Narrow Version: The theory provides little explanation on its influence on rate of interest. This constitutes his demand for money to hold. Liquidity preference theory is most relevant to the short run and supposes that the interest rate adjusts to bring money supply and money demand into equilibrium. This is an important factor which is very important in mapping the liquidity curve. Monetary policy can be described either in terms of the money supply or in terms of the interest rate. Liquidity refers to the convenience of holding cash. Introduction Loanable funds theory, liquidity preference theory, the IS/LM model’s determination of the interest rate, and the more recent general equilibrium-based models of interest rate determination, together share the role of interest rate theory in the economics curriculum. liquidity preference is the relevant theory of interest. The liquidity preference theory of interest explained. These merits are as follows: Firstly, Keynes’s theory is a monetary rather than a real theory. Liquidity Preference refers to the additional premium which holders of wealth or investors will require in order to trade off cash and cash equivalents in exchange for those assets that are not so liquid. Liquidity Preference Theory. It should also be noted that economic historians have not entirely neglected Keynes's monetary policy. Equation (6) is the most important in the model since it incorporates the idea of liquidity preference. But they have not followed the theory through to the debt management conclusions that Keynes drew. It adds a premium called liquidity premium Liquidity Premium A liquidity premium compensates investors for investing in securities with low liquidity. b. short run and supposes that the interest rate adjusts to bring money supply and money demand into balance. It ought into spotlight the role of money in the determination of the rate of interest. It is the basis of a theory in economics known as the liquidity preference theory. The theory of liquidity preference is indeterminate or unspecified as it fails to consider the different levels of income. Moggridge … Introduction iquidity preference theory was developed by eynes during the early 193 ’s following the great depression with persistent unemployment for which the quantity theory of money has no answer to economic problems in the society Jhingan (2004). Money commands universal acceptability. Money is the most liquid assets. Among these might be government bonds, stocks, or real estate.. Key words: refinement, liquidity, preference theory, proposition, Keynesian model.