Liquidity preference refers to the demand for money, considered as liquidity. The concept was first developed by Keynes to explain determination of the interest rate by the supply and demand for money. The marginal efficiency of capital displays the expected rate of return from investment, at a particular given time. The marginal efficiency of capital is compared to the rate of interest. If the marginal efficiency of capital was lower than the interest rate, the firm would be better off not investing, but saving the money.
Economics / August 19, 2021
LIQUIDITY PREFERENCE AND MARGINAL EFFICIENCY
Liquidity preference refers to the demand for money, considered as liquidity. The concept was first developed by Keynes to explain determination of the interest rate by the supply and demand for money. The marginal efficiency of capital displays the expected rate of return from investment, at a particular given time. The marginal efficiency of capital […]