The following points highlight the six criticisms against the Keynes’s liquidity preference theory. The criticisms are: 1. Indeterminate Theory 2. Ignores 'Real' Factors Altogether 3. No Liquidity without Saving is Available 4. Goes Contrary to Observed Facts 5. 'All or Nothing' Theory 6. Begs the Question. Keynes’s Liquidity Preference Theory Criticism # 1. Indeterminate Theory: Keynes criticised the classical theory [...]
The Liquidity Preference Theory presented by J. M. Keynes in 1936 is the most celebrated of all. According to Keynes, the rate of interest is a purely monetary phenomenon. It is the reward for parting with liquidity for a specific period of time. Thus, like the price of a commodity, the rate of interest is determined by the demand for [...]
Liquidity Preference versus Loanable Funds: We find that an unnecessary controversy has been raised as to the choice between liquidity preference and loanable funds theories of interest rate. Those who prefer loanable funds theory contend that it is broader in scope as it permits for more influence on the rate of interest than the liquidity preference theory allows. For example, [...]