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Q: How does the liquidity preference theory determine the interest rate?

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According to John Maynard Keynes (Liquidity Preference Theory - Keynesians), people hold cash for three main reasons: Transactions purposes, precautionary purposes and speculative purposes.

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Liquidity Preference Theory is a model that suggests that an investor should demand a higher interest rate or premium on securities with long-term maturities that carry greater risk because, all other factors being equal, investors prefer cash or other highly liquid holdings.

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The Theory and Practice of Corporate Liquidity Policy. January ... The trade off view suggests that firms trade off various costs and benefits.

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The three theories include the liquidity premium theory, the market segmentation theory, and the expectations hypothesis.

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