economics medium True/False

The 'Liquidity Preference Theory' proposed by John Maynard Keynes asserts that the interest rate is determined by the intersection of the demand for money (liquidity) and the exogenously fixed supply of money controlled by the central bank.

  1. True
  2. False

Answer: True

Keynes revolutionized monetary theory by arguing that interest is not a reward for saving (as classical economists believed), but rather a reward for parting with liquidity. People demand cash for transaction, precautionary, and speculative motives. The equilibrium interest rate is established where the public's desire to hold liquid cash perfectly matches the fixed money supply injected by the central bank.

Topic Macroeconomics - Money
Exam Relevance UPSC Prelims, SSC CGL, Banking
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