Liquidity preference affects interest rates from "summary" of The General Theory of Employment, Interest, and Money by John Maynard Keynes
Liquidity preference is the desire of individuals to hold their wealth in liquid form, such as money, rather than in other assets. This preference is influenced by various factors, including the level of uncertainty about the future and the ease with which assets can be converted into money. When people have a higher liquidity preference, they are more likely to hold onto their money rather than invest it in other assets, such as bonds or stocks. The level of liquidity preference in an economy has a direct impact on interest rates. When people have a strong preference for liquidity, they demand higher interest rates to be compensated for holding onto their money rather than investing it. This increased demand for higher interest rates leads to an upward pressure on interest rates in the economy. Conversely, when people have a lower liquidity preference, they are more willing to invest their money in other assets, even at lower interest rates. This decreased demand for higher interest rates exerts a downward pressure on interest rates in the...
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