Liquidity preference Assignment Essay

Liquidity preference Assignment Essay

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Liquidity preference Assignment Essay

Liquidity preference is a theory in economics that explains why people prefer to hold some of their wealth in the form of liquid assets, such as cash or bank deposits. This is because liquid assets can be easily converted into goods or services, and they are not subject to the same risks as other assets, such as stocks or bonds.

The theory of liquidity preference was first developed by John Maynard Keynes in his book The General Theory of Employment, Interest and Money (1936). Keynes argued that people’s demand for liquidity is determined by three factors:

• Transactions demand: This is the demand for money to finance everyday transactions. For example, people need to hold some money on hand to pay for groceries, gas, and other essential goods and services.
• Precautionary demand: This is the demand for money to hold as a buffer against unexpected expenses. For example, people might hold some money in case they lose their job or have a medical emergency.
• Speculative demand: This is the demand for money to hold as an investment. People might hold some money in cash or bank deposits if they believe that interest rates are going to fall, and they want to be able to buy bonds at a lower price.

Keynes argued that the demand for liquidity is inversely related to the interest rate. This means that as the interest rate rises, people will be less willing to hold money, and they will instead invest their money in other assets, such as bonds or stocks.

The theory of liquidity preference has important implications for monetary policy. If the central bank wants to increase the amount of money in circulation, it can lower the interest rate. This will make money more attractive to hold, and it will encourage people to spend more money.

The theory of liquidity preference has also been used to explain why recessions occur. Keynes argued that during a recession, people’s demand for liquidity will increase. This is because they will be more likely to hold onto their money in case they lose their job or have other unexpected expenses. This increase in liquidity preference will lead to a decrease in the money supply, which will in turn lead to a decrease in economic activity.

The theory of liquidity preference is a complex and controversial theory, but it has been an important part of economic thought for over 80 years. It continues to be used by economists to understand how money and interest rates affect the economy.

In addition to the three factors mentioned by Keynes, there are other factors that can affect people’s liquidity preference. These include:

• Uncertainty: The more uncertain the economic outlook, the more likely people are to hold onto their money.
• Risk aversion: People who are more risk averse are more likely to hold onto their money, even if the interest rate is low.
• Institutional factors: The availability of other liquid assets, such as money market funds, can also affect people’s liquidity preference.

The theory of liquidity preference is a powerful tool for understanding how money and interest rates affect the economy. It has been used by economists to explain a wide range of economic phenomena, from recessions to financial crises. While the theory is not without its critics, it remains an important part of economic thought.

Liquidity preference Assignment Essay

RUBRIC QUALITY OF RESPONSE NO RESPONSE POOR / UNSATISFACTORY SATISFACTORY GOOD EXCELLENT Content (worth a maximum of 50% of the total points) Zero points:  Student failed to submit the final paper. 20 points out of 50:  The essay illustrates poor understanding of the relevant material by failing to address or incorrectly addressing the relevant content; failing to identify or inaccurately explaining/defining key concepts/ideas; ignoring or incorrectly explaining key points/claims and the reasoning behind them; and/or incorrectly or inappropriately using terminology; and elements of the response are lacking. 30 points out of 50:  The essay illustrates a rudimentary understanding of the relevant material by mentioning but not full explaining the relevant content; identifying some of the key concepts/ideas though failing to fully or accurately explain many of them; using terminology, though sometimes inaccurately or inappropriately; and/or incorporating some key claims/points but failing to explain the reasoning behind them or doing so inaccurately.  Elements of the required response may also be lacking. 40 points out of 50:  The essay illustrates solid understanding of the relevant material by correctly addressing most of the relevant content; identifying and explaining most of the key concepts/ideas; using correct terminology; explaining the reasoning behind most of the key points/claims; and/or where necessary or useful, substantiating some points with accurate examples.  The answer is complete. 50 points:  The essay illustrates exemplary understanding of the relevant material by thoroughly and correctly addressing the relevant content; identifying and explaining all of the key concepts/ideas; using correct terminology explaining the reasoning behind key points/claims and substantiating, as necessary/useful, points with several accurate and illuminating examples.  No aspects of the required answer are missing. Use of Sources (worth a maximum of 20% of the total points). Zero points:  Student failed to include citations and/or references. Or the student failed to submit a final paper. 5 out 20 points:  Sources are seldom cited to support statements and/or format of citations are not recognizable as APA 6th Edition format. There are major errors in the formation of the references and citations. And/or there is a major reliance on highly questionable. The Student fails to provide an adequate synthesis of research collected for the paper. 10 out 20 points:  References to scholarly sources are occasionally given; many statements seem unsubstantiated.  Frequent errors in APA 6th Edition format, leaving the reader confused about the source of the information. There are significant errors of the formation in the references and citations. And/or there is a significant use of highly questionable sources. 15 out 20 points:  Credible Scholarly sources are used effectively support claims and are, for the most part, clear and fairly represented.  APA 6th Edition is used with only a few minor errors.  There are minor errors in reference and/or citations. And/or there is some use of questionable sources. 20 points:  Credible scholarly sources are used to give compelling evidence to support claims and are clearly and fairly represented.  APA 6th Edition format is used accurately and consistently. The student uses above the maximum required references in the development of the assignment. Grammar (worth maximum of 20% of total points) Zero points:  Student failed to submit the final paper. 5 points out of 20:  The paper does not communicate ideas/points clearly due to inappropriate use of terminology and vague language; thoughts and sentences are disjointed or incomprehensible; organization lacking; and/or numerous grammatical, spelling/punctuation errors  10 points out 20:  The paper is often unclear and difficult to follow due to some inappropriate terminology and/or vague language; ideas may be fragmented, wandering and/or repetitive; poor organization; and/or some grammatical, spelling, punctuation errors 15 points out of 20:  The paper is mostly clear as a result of appropriate use of terminology and minimal vagueness; no tangents and no repetition; fairly good organization; almost perfect grammar, spelling, punctuation, and word usage. 20 points:  The paper is clear, concise, and a pleasure to read as a result of appropriate and precise use of terminology; total coherence of thoughts and presentation and logical organization; and the essay is error free. Structure of the Paper (worth 10% of total points) Zero points:  Student failed to submit the final paper. 3 points out of 10: Student needs to develop better formatting skills. The paper omits significant structural elements required for and APA 6th edition paper. Formatting of the paper has major flaws. The paper does not conform to APA 6th edition requirements whatsoever. 5 points out of 10: Appearance of final paper demonstrates the student’s limited ability to format the paper. There are significant errors in formatting and/or the total omission of major components of an APA 6th edition paper. They can include the omission of the cover page, abstract, and page numbers. Additionally the page has major formatting issues with spacing or paragraph formation. Font size might not conform to size requirements.  The student also significantly writes too large or too short of and paper 7 points out of 10: Research paper presents an above-average use of formatting skills. The paper has slight errors within the paper. This can include small errors or omissions with the cover page, abstract, page number, and headers. There could be also slight formatting issues with the document spacing or the font Additionally the paper might slightly exceed or undershoot the specific number of required written pages for the assignment. 10 points: Student provides a high-caliber, formatted paper. This includes an APA 6th edition cover page, abstract, page number, headers and is double spaced in 12’ Times Roman Font. Additionally, the paper conforms to the specific number of required written pages and neither goes over or under the specified length of the paper.
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