Liquidity Preference and Risk Aversion

In Keynes’s hands liquidity preference largely involved the speculative demand, with some elements of precautionary demand. He considered only two assets, money and bonds, whereas in reality portfolios are diversified. The explanation below follows Tobin’s classic article and continues the assumption of price stability. Recall that Keynes’s analysis of liquidity preference led to the derivation of an individual’s r_c, a critical rate of interest defined in terms of the expected rate (r_e. See Chapter 8).