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THEORIES OF INTEREST PART 2
What does Keynes's Liquidity Preference Theory state about the rate of interest?
Keynes argued that the rate of interest is determined by the demand for and supply of money, where demand arises from liquidity preference motives. It is essentially a monetary phenomenon, not a real one.
What is the Abstinence Theory of interest and who proposed it?
Senior's theory: interest rewards abstaining from immediate consumption.
What are the three motives for holding money according to Keynes's Liquidity Preference Theory?
Keynes identified three motives: the transactions motive (for day-to-day expenditures), the precautionary motive (for unforeseen contingencies), and the speculative motive (to gain from future changes in bond prices).
What is the Waiting Theory of interest as explained by Alfred Marshall?
Interest compensates savers for waiting to use their capital later.
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