KEYNES LIQUIDITY PREFRENCE THEORY: APPLICATIONS AND IMPACT

This presentation explores John Maynard Keynes’ economic theories, focusing on aggregate demand, government intervention, fiscal policies, and their relevance in tackling recessions, unemployment, and economic fluctuations. It includes real-world applications and critiques of Keynesian economics.

1. Keynes' Liquidity
Preference Theory

This presentation explores Keynes’ Liquidity Preference Theory. Learn
how interest rates are determined by the demand for money.
Understand the motives behind holding money and the concept of a
liquidity trap.

2. Understanding Liquidity Preference

Origin Core Idea Explanation

Developed by John Maynard Keynes Interest rates balance money Explains interest rate determination
in 1936. demand with money supply. based on demand for money.

3. Motives for Holding Money

1 Transaction Motive 2 Precautionary Motive 3 Speculative Motive

For daily transactions; increases For emergencies; also rises with For investment opportunities;
with income. income. varies with interest rates.

4. The Liquidity Preference Function

Md = L(T, P, S) T (Transaction motive)
Keynes' money demand function. Dependent on income level.
P (Precautionary motive) S (Speculative motive)

Also income-dependent. Inversely related to interest rates.

5. Liquidity Preference
Curve

Downward Slope
1 Reflects inverse relationship between interest rates and
money demand.
Higher rates
2 Lower demand,
Lower rates
3

Higher demand.

Interest Rate (9)

Liquidity Preference Curve

— guy Preference Curve

025 050 075 100 125 150 175 200
Money Demand

6. Money Market Equilibrium
æ > T

Interest rate: money demand meets Money supply increases: interest Money supply decreases: interest
money supply. rates fall. rates rise.

7. Equilibrium Graph

Money Market Equilibrium

10 —— Money Demand (Liquidity Preference)
—- Money Supply (Fixed)
8
=
$ 6
2
S 4
2

o 2 2 3 4
Money Demand & Supply

8. The Liquidity Trap

1 Near Zero

Occurs when interest rates are near zero.

2 Ineffective

Monetary policy becomes ineffective.

3 Hoarding

People hoard cash instead of investing.

WNER
GILET
MIRET
STIMEN
DEPESSON

9. Liquidity Trap Graph

Liquidity Trap

2.00 — Liquidity Trap Curve
= Zero Lower Bound

2 4 6 8
Money Demand

1 Horizontal

2 Zero Interest

No Investment

10. Criticisms of the Theory

1 Savings & Investment
2 Speculation
3 Fixed Supply

4 Inflation