Explain Liquidity preference curve.
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Explain Liquidity preference curve.
Liquidity Preference Curve
The liquidity preference curve, introduced by John Maynard Keynes, represents the demand for money in an economy.
It shows the relationship between the interest rate and the quantity of money people wish to hold. At lower interest rates, people prefer to hold more money as liquidity (cash or liquid assets) because the opportunity cost of holding money (foregone interest) is lower.
The curve is typically downward sloping, indicating that as interest rates fall, the demand for money (liquidity preference) increases. Conversely, as interest rates rise, people are incentivized to deposit money or invest, reducing their liquidity preference.