FLUID PREFERENCE THEORY

The cash funds is called liquidity and the choice of the people for cash money is named liquidity preference. According to Keynes persons demand fluid or choose liquidity because they have 3 different reasons for having cash instead of bonds and so forth 1 . 2 . 3. Purchase Motive Precaution Motive Speculative Motive

Deal Motive

Day time –to-day deals are done by individuals and firms. A person person needs to buy so many things during a day time. For this purpose people want to hold some cash funds with these people. This type of with regard to liquidity is good for carrying everyday transactions is referred to as demand for fluidity for purchase motive. And so we can admit money required by buyers, businessmen and more in order to complete economic transactions is known as the necessity for money intended for transactions purpose. This demand depends upon the subsequent. i) Size of the salary If size of the salary is high more would be the transactions and vice versa. ii) Time gap between the receipts of salary If a person gets his pay daily he will require less cash cash. On the other hand if perhaps time gap is more a person will certainly demand more cash to carry on his daily transactions. iii) Spending habit If the person can be spendthrift he will do even more transactions. Normally he will require more money and vice versa. The demand for money for this purpose is completely interest inelastic. Interest Rate i'

i

Demand for Funds Qm

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PREVENTIVE MOTIVE

Just about every man really wants to save anything or would like to keep some liquid funds with him to meet a lot of unforeseen disasters, contingencies and accidents. In the same way business companies also want to keep some cash cash with these to safeguard their very own future. This kind of demand for fluidity is called with regard to precautionary motive. This demand depends upon various factors. i) Size of the income In case the size of the income of any person or maybe a firm is usually large, he may demand more cash for safeguarding his foreseeable future. Nature from the person Some persons happen to be optimistic and some are depressed. The former believe always about the bright side of upcoming. So they anticipates much less, if any kind of risk and danger down the road. Naturally such persons is going to demand less money for precautionary motive. On the other hand, pessimistic people or firms foresee various dangers, disasters and emergencies in the future. In order to meet these types of, they want to have more cash with them. Farsightedness A farsighted person is able to see better regarding the future. He will make a proper guess for the future. Thus in the event he desires more disasters, he will keep a larger portion money with him in cash and vice versa.

ii)

iii)

T he with regard to money for precautionary purpose is also totally interest inelastic.

Interest Rate i'

i

Demand for Money Qm

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SPECULATIVE MOTIVE

People wish to keep money with them to take advantage of the changes in the prices of bonds and securities. In advanced countries, people love to hold cash for the purchase of provides and investments when they think it lucrative. If the rates of the you possess and securities are expected to increase speculators will need to purchase these people. In this situation they will not want to keep cash with these people. On the other hand if prices in the bonds and securities are expected to land people should to keep funds with them. They will get the bonds and securities with the cash only if their prices would fall season. So fluidity preference is often more at lower interest rates.

Rate of interest

Demand for Funds

THE LIQUIDITIY PREFERENCE SHAPE

The ventures balances and precautionary bills are organised with the purpose of being used to make purchases as and when required, they are really sometimes jointly referred as demand for active balances. The important point regarding the demand intended for active bills is that it is not necessarily responsive to changes in the rate of interest we. e. it really is interest...

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