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liquidity preference theory demand for money | Liquidity trap

liquidity preference theory demand for money , Liquidity trap, Registration form for offline Classes https://forms.gle/FvmspMhoTj4SsaxD8 Website www.vishnueconomicsschool.in Download my app Vishnu ECONOMICS SCHOOL from the playlist or the link is given below https://play.google.com/store/apps/de... TELEGRAM https://t.me/Vishnueconomicsschool FACEBOOK PAGE https://www.facebook.com/Vishnu-Econo... INSTAGRAM   / vishnuecoschool   Link of Separate Channel Link For UPSC ECONOMICS    / Канал   Our channel for commerce students VE Academy of Commerce    / @vishnueconomicsschoolenglish   Link of Separate Channel Link For UPSC ECONOMICS    / Канал   DEMO ENGLISH MEDIUM MICROECONOMICS    • MICROECONOMICS   MACROECONOMICS    • MACROECONOMICS   INTERNATIONAL ECONOMICS    • INTERNATIONAL ECONOMICS   PUBLIC FINANCE    • PUBLIC FINANCE   STATISTICS    • statistics   Environmental Economics    • environmental economics   ECONOMIC GROWTH AND DEVELOPMENT    • ECONOMIC GROWTH AND DEVELOPMENT   HINDI MEDIUM 1 व्यष्टि अर्थशास्त्र    • UGC NET ECONOMICS ( HINDI MEDIUM )   2 समष्टि अर्थशास्त्र    • 2 समष्टि अर्थशास्त्र   3 अंतरराष्ट्रीय व्यापार    • 3 अंतरराष्ट्रीय व्यापार   4 लोक वित्त    • 4 लोक वित्त   5 मुद्रा एवं बैंकिंग    • 5 मुद्रा एवं बैंकिंग   7 भारतीय अर्थव्यवस्था    • 7 भारतीय अर्थव्यवस्था   पर्यावरणीय अर्थशास्त्र    • 6 पर्यावरणीय अर्थशास्त्र   8 जनांकिकी    • 8 जनांकिकी   9 सांख्यिकी    • 9 सांख्यिकी   Liquidity demand theory for Money (Keynesian approach) Meaning of liquidity demand for money: The demand for money is the desired holding of financial assets in the form of money that is, cash or bank deposits rather than bonds. It is also called liquidity preference. If we hold money for the transactions purpose, we will not get any interest but we can spend is money according to our need. Bonds pay a positive interest rate, but they cannot be used for transactions. Holding all your wealth in the form of money is very convenient but, interest income will be foregone. On the other hand, if you hold all your wealth in the form of bonds, you will earn interest but you will not be able to use it for making payments. According to the Keynesian theory of money demand, there are three purposes for demand for money 1. Transaction demand – People need money to handle their daily transactions. It is because there is a time lag between expenditure and income. As such, each individual and firm would like to hold a part of their income in cash for meeting their routine transactions of the day. The amount of cash kept for this purpose depends upon three factors: • Size of income • Periodicity of income received and • Mode of expenditure. There is a direct relationship between money demand for transactions purpose and the level of income. Whereas variation in the market rate of interest has no impact on the money demand for transactions purposes. L₁ = f(Y) 2. Precautionary Motive: The desire of the public (individual and firm) to hold money to encounter certain emergent situations in the future like sleekness, unemployment, etc. The amount of cash held for precautionary motive is also a direct function of the level of income and independent of the rate of interest. L₂ = f(Y) L1 and L2 together are often symbolised as M₁. M1= L1 + L₂ 3. Speculative Motive or Asset Demand for Money: Speculative demand for money refers to the demand for cash that people wish to hold money to buy bonds. He argued that demand for money is a choice between holding cash and buying bonds. Speculative demand for money is a function of the rate of interest. When people expect the rate of interest to increase in the future, they will be reluctant to part with their liquidity at present. On the other hand, if the rate of interest is expected to come down in the near future, people would be willing to convert their liquidity into bonds. If a