… According to liquidity preference theory, the opportunity cost of holding money . In its crude from the theory states that the purchasing power of money depends directly on the quantity of money. Due to the first two motivations, real money balances increase directly with output. Comparison between loanable funds theory and liquidity preference theory. Note that the interest rate is not considered at all in this so-called naÃ¯ve version. In particular, Keynesian liquidity-preference theory is concerned with the optimal relationship between the stock of money and the stocks of other assets, whereas the quantity theory (includ- ing the Cambridge school) was primarily concerned with the direct rela- Liquidity preference theory states that money is a store of value, a standard of deferred payment and the usual medium of exchange. Monetarist theory holds that it's the supply of money, rather than total spending, that drives the economy. And both transaction and precautionary demand are closely linked to technology: the faster, cheaper, and more easily bonds and money can be exchanged for each other, the more money-like bonds will be and the lower the demand for cash instruments will be, ceteris paribus. When interest rates are low (high), so is the opportunity cost, so people hold more (less) cash. The interest rate is determined then by the demand for money (liquidity preference) and money supply. The rest of this book is about monetary theory, a daunting-sounding term. The following article will guide you about how Keynesian theory of money differs from the quantity theory. Answer to: What are the similarities between the Keynesian liquidity preference and the quantity theory of money? When rates are low, better to play it safe and hold more dough. f Y i ( , ) P M D = f Y i ( , ) Y M PY V S = = 11 3. keynes supply of money depends upon money circulation and bank deposits in a country. In liquidity preference theory, the demand for money is liquid. LIQUIDITY PREFERENCE THEORY The cash money is called liquidity and the liking of the people for cash money is called liquidity preference. most of the time it is quite difficult to separate the different functions of money. John Maynard Keynes mentioned the concept in his book The General Theory of Employment, Interest, and Money … This claim is based on references to publications by D.H. Robertson and J.M. So people hold larger money balances when rates are low. Hence on this assumption the quantity of goods and services can be taken as fixed relatively to the quantity of money. BIBLIOGRAPHY “Liquidity preference” is a term that was coined by John Maynard Keynes in The General Theory of Employment, Interest and Money to denote the functional relation between the quantity of money demanded and the variables determining it (1936, p. 166). The value of money differs from the value of any other object in one fundamental respect, namely, the fact that the value of money represents general purchasing power or command over goods and services. According to Keynes General Theory, the short-term interest rate is determined by the supply and demand for money. Although a good first approximation of reality, the classical quantity theory, which critics derided as the ânaÃ¯ve quantity theory of money,â was hardly the entire story. Due to the speculative motive, real money balances and interest rates are inversely related. The speculative motive is facilitated by the store of value function of money. Liquidity Preference Theory refers to money demand as measured through liquidity. Keynes believed that changes in the money supply affect aggregate demand because of the relationship between the rate of interest and planned investment. 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