What are the motives of demand for money according to Keynes? Explain.

In the liquidity preference theory of interest, J.M. Keynes explained that people demand money (prefer to hold liquidity) for three motives, and this demand for money, together with the fixed money supply, determines the rate of interest.

1. Meaning of liquidity preference: the demand for money is the desire to hold wealth in the form of liquid cash rather than in less-liquid assets, and interest is the reward for parting with this liquidity.

The transaction motive:

2. Meaning: people hold cash to meet day-to-day expenses, bridging the gap between receiving income and spending it.
3. Determinant: it depends mainly on the level of income, written LT = f(Y), rising as income rises.

The precautionary motive:

4. Meaning: people hold cash to meet unforeseen and emergency needs such as sickness, accidents or unemployment.
5. Determinant: it too depends on income, written LP = f(Y); together with the transaction motive it forms the "active cash balance," which depends only on income.

The speculative motive:

6. Meaning: people hold money to take advantage of expected future changes in interest rates and bond prices.
7. Inverse relation with interest: since bond prices and interest rates move inversely, the speculative demand for money is a decreasing function of the interest rate, written LS = f(r) — higher interest means lower speculative demand, and vice versa.
8. The liquidity trap: at a very low interest rate everyone prefers to hold money (expecting rates to rise and bond prices to fall), so the speculative demand becomes perfectly elastic (horizontal) — the liquidity trap, where extra money supply cannot lower interest further.
9. Total demand for money: the total demand is the sum of the transaction, precautionary and speculative demands; the first two depend on income and the third on the interest rate.
10. Role in interest determination: this total money demand (liquidity preference), interacting with the money supply fixed by the central bank, determines the equilibrium rate of interest.

Thus, according to Keynes people demand money for the transaction, precautionary and speculative motives — the first two depending on income and the third on the interest rate — and this liquidity preference, with a fixed money supply, determines the rate of interest.