Explain the reasons why people demand money according to the liquidity preference theory. Consider which reason is the most important.

Mark scheme

Marking points from the official mark scheme (May/June 2017). The mark or mark type is shown in brackets.

1. [12] Description of transactions, precautionary and speculative with a suggestion as to the most important. It is likely that transactions would be the most important, but expect a reason for the choice.
2. [12] Level 4 (9-12 marks): for a sound description and a clear understanding of the principles involved together with a reasoned conclusion for the choice of most important.
3. [13] Discussion of the theory that low interest rates encourages borrowing and spending, production and employment, higher interest rates deter borrowing, Higher than expected inflation could result in a rise in interest rates to stop prices rising further because of pressure from demand.
4. [13] Level 4 (9-13 marks): for a sound discussion and a clear understanding of the principles involved and a reasoned conclusion.