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Related to liquidity preference: Market segmentation theory
Liquidity Preference Hypothesis
A theory stating that, all other things being equal, investors prefer liquid investments to illiquid ones. This is because investors prefer cash and, barring that, prefer investments to be as close to cash as possible. As a result, investors demand a premium for tying up their cash in an illiquid investment; this premium becomes larger as illiquid investments have longer maturities. This theory is more formally stated as: forward rates are greater than future spot rates. John Maynard Keynes was the first to propose the liquidity preference hypothesis. See also: Keynesian economics.
liquidity preferencea preference for holding MONEY instead of investing it. KEYNES identifies three motives for holding money:
- TRANSACTIONS DEMAND: money held on a day-to-day basis to finance current purchases;
- PRECAUTIONARY DEMAND: money held to meet unexpected future outlays;
- SPECULATIVE DEMAND - money held in anticipation of a fall in the price of assets. The amount of money held for these purposes depends on two main factors: the INTEREST RATE and the level of NATIONAL INCOME. See MONEY DEMAND SCHEDULE.