The Keynesian theory of interest rate, also known as the liquidity preference theory, states that interest rates are set by the supply and demand for money. This differs from other theories that focus only on saving and investment.

Key points of this theory include:

• People prefer liquidity, which means they prefer to hold cash, because the future is uncertain.
• When interest rates are high, people are more likely to lend their money rather than keep it as cash, which decreases their demand for money.
• The theory highlights that expectations and uncertainty are the main factors that determine how much money people want to hold at any given time.