Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. Thus, like the price of a commodity, the rate of interest … If size of the income is high more will be the transactions and vice versa. If the economy starts at … ii) Time gap between the receipts of income Refer to Figure 33-4. 3. 1. 6 as a result of anticipated changes in bond prices. If the central bank increases the quantity of money in circulation the supply curve of money will shift to the right and … On the other hand if time gap demand for liquidity is for carrying day to day transactions is called demand for liquidity for transaction The last two theories are the most important ones and may now be discussed in detail. According to liquidity preference theory, the opportunity cost of holding money is the inflation rate False When the interest rate increases, the opportunity cost of holding money decreases, so the quantity of money demanded decreases. This theory has a natural bias toward a positively sloped yield curve. Day –to-day transactions are done by individuals as well as firms. The Liquidity Preference Theory was propounded by the Late Lord J. M. Keynes. D) a combination of expectations, market expectations and liquidity preference. Preference to hold the wealth is called liquidity preference. The longer the maturity of the security, the greater will be the risk or the fluctuation in value of Principal to the investor. Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. The Hicks-Hansen analysis is thus an integrated and determinate theory of interest in which the two determinates, the IS and LM curves, based on productivity, thrift, liquidity preference and the supply of money, all play their parts in the determination of the rate of interest. See our Privacy Policy and User Agreement for details. Transaction Motive The determination of the rate of interest can be better explained in the shop. Liquidity Preference Theory According to Keynes (1964, p. 167), liquidity preference theory, in The General Theory, consists in the statement that “the rate of interest at any time, being the reward for parting with liquidity, is a measure of the unwillingness of those who possess money to part with their liquid control over it. If a person gets his pay daily he will demand less cash money. Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. Exim Bank, Islampur Branch, Liquidity Premium Hypothesis: Investors are risk averse and would prefer liquidity and consequently short-term investments. Now customize the name of a clipboard to store your clips. Precaution Motive 1. THE CLASSICAL THEORY This theory is assosiated with the names of Ricardo, Fisher and some others . Now customize the name of a clipboard to store your clips. In other words, the interest rate is the ‘price’ for money. Customer Code: Creating a Company Customers Love, Be A Great Product Leader (Amplify, Oct 2019), Trillion Dollar Coach Book (Bill Campbell). 2. The LP curve represents …