Description
MANAGERIAL ECONOMICS PROJECT
MANAGERIAL ECONOMICS
LIQUIDITY PREFERENCE THEORY OF KEYNES
SYBMS
CONCEPT OF MONEY
• Money is primarily a medium of exchange. • The demand for money is the desired holding of financial assets in the form of money: that is, cash or bank deposits. • Liquidity is the measure of easily assets can be turned into cash.
LIQUIDITY PREFERENCE THEORY OF KEYNES
• The Liquidity Preference Theory was developed by John Maynard Keynes in 1936. • Keynesian view stated that the demand for money is determined by what people 'want to hold'. • The demand for money, in the Keynesian sense, is a demand for liquidity or "liquidity preference."
MOTIVES FOR LIQUIDITY PREFERENCE
• The cash money is called liquidity and the desire of the people to hold cash money is called liquidity preference. • According to Keynes, there are three motives behind the desire of the public to hold liquid cash: (1) The Transactive Motive ;
(2) The Precautionary Motive, and
(3) The Speculative Motive.
TRANSACTIVE MOTIVE
• Keynes defines transactions motive for holding money as “the need of cash for the current transactions of personal and business expenditure.’’ • The respective transactions motives may be referred to as - income motive and business motive.
The Income Motive
• This refers to the transaction motive of the households, i.e., consumers' class. • Consumer's demand for money depends upon: ? The Level of Income ? The Price Level ? The Spending Habits ? The Time-Interval
The Business Motive
• This refers to the transactions motive to the entrepreneur class or business community. • Money held by producers for meeting business expenses is said to be held to satisfy the business motive. • The larger the turnover, the larger will be the demand for money.
PRECAUTIONARY MOTIVE
• People generally desire to hold some additional money balances against unforeseen contingencies • Future uncertainty is an important factor determining the precautionary demand for money • The precautionary demand for money is incomedetermined and is relatively stable.
SPECULATIVE MOTIVE
• People in the community hold cash balances for speculative purposes. • The speculative motive for holding cash balances arises from uncertainty about the future rates of interest. • The purpose of holding money under the speculative motive is to use it for speculation for earning income.
LIQUIDITY TRAP
• It is a situation in which prevailing interest rates are low and savings rates are high. • A liquidity trap occurs when low / zero interest rates fail to stimulate consumer spending and monetary policy becomes ineffective. • People and businesses hold on to their cash and thus get trapped in a self-fulfilling prophecy.
Liquidity Trap Curve
doc_414711612.pptx
MANAGERIAL ECONOMICS PROJECT
MANAGERIAL ECONOMICS
LIQUIDITY PREFERENCE THEORY OF KEYNES
SYBMS
CONCEPT OF MONEY
• Money is primarily a medium of exchange. • The demand for money is the desired holding of financial assets in the form of money: that is, cash or bank deposits. • Liquidity is the measure of easily assets can be turned into cash.
LIQUIDITY PREFERENCE THEORY OF KEYNES
• The Liquidity Preference Theory was developed by John Maynard Keynes in 1936. • Keynesian view stated that the demand for money is determined by what people 'want to hold'. • The demand for money, in the Keynesian sense, is a demand for liquidity or "liquidity preference."
MOTIVES FOR LIQUIDITY PREFERENCE
• The cash money is called liquidity and the desire of the people to hold cash money is called liquidity preference. • According to Keynes, there are three motives behind the desire of the public to hold liquid cash: (1) The Transactive Motive ;
(2) The Precautionary Motive, and
(3) The Speculative Motive.
TRANSACTIVE MOTIVE
• Keynes defines transactions motive for holding money as “the need of cash for the current transactions of personal and business expenditure.’’ • The respective transactions motives may be referred to as - income motive and business motive.
The Income Motive
• This refers to the transaction motive of the households, i.e., consumers' class. • Consumer's demand for money depends upon: ? The Level of Income ? The Price Level ? The Spending Habits ? The Time-Interval
The Business Motive
• This refers to the transactions motive to the entrepreneur class or business community. • Money held by producers for meeting business expenses is said to be held to satisfy the business motive. • The larger the turnover, the larger will be the demand for money.
PRECAUTIONARY MOTIVE
• People generally desire to hold some additional money balances against unforeseen contingencies • Future uncertainty is an important factor determining the precautionary demand for money • The precautionary demand for money is incomedetermined and is relatively stable.
SPECULATIVE MOTIVE
• People in the community hold cash balances for speculative purposes. • The speculative motive for holding cash balances arises from uncertainty about the future rates of interest. • The purpose of holding money under the speculative motive is to use it for speculation for earning income.
LIQUIDITY TRAP
• It is a situation in which prevailing interest rates are low and savings rates are high. • A liquidity trap occurs when low / zero interest rates fail to stimulate consumer spending and monetary policy becomes ineffective. • People and businesses hold on to their cash and thus get trapped in a self-fulfilling prophecy.
Liquidity Trap Curve
doc_414711612.pptx