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What is meant by liquidity preference theory? Why will people hold on to more money when...

What is meant by liquidity preference theory? Why will people hold on to more money when interest rates are low? ( WRITTEN RESPONSE do not send a picture of your response. )

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Answer) Liquidity preference means the desire of the public to hold cash. According to Keynes, there are three motives behind the desire of the public to hold liquid cash: (1) the transaction demand (2) the precautionary demand (3) the speculative demand.

People hold on to more money when interest rate are low because individuals speculate or expect that bond price is high and it is expected to fall in future then they hold more money in hand waiting for bond prices to fall and interest rate to rise. Speculate demand for money is higher when interest rate is low and lesser when interest rate is high.

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