Liquidity Preference Theory: Understanding the Influential Factors Behind Holding Cash in an Economy

The video explores Keynes' liquidity preference theory, which examines why economic agents hold liquidity and how interest rates influence these holdings. It introduces the transactions, precautionary, and speculative motives for holding money. The speculative motive is linked to bond prices and interest rates. The video also explains how the liquidity preference curve interacts with the money supply to determine interest rates, and discusses the concept of a liquidity trap, where interest rate changes become ineffective.

Discuss the relationship between the supply of money and interest rates.

How do changes in the liquidity preference curve impact interest rates?

In what ways can the Central Bank respond to changes in liquidity preference?

What is a liquidity trap and how does it affect monetary policy?