Keynes believed that liquidity preference or demand for money is due to the following three motives.

Transaction Motive
Individuals, households and firms want to hold cash in hand or prefer liquidity for transaction purpose. For example, individuals hold cash to purchase goods for their daily needs, for example, cigarettes, snacks etc. Households also hold cash to meet their daily needs. For example, they purchase meat, vegetables eggs etc; with the cash they hold. Similarly firms also hold cash transaction purpose. Firms hold cash to purchase raw material, pay wages to laborer etc. Thus, total amount of money which is held by individuals, households and firms for transaction purpose is called “demand for money for money for transaction motive”.

Demand for money for transaction motion related with the length of time between income and expenditure. The more the length of time is between income and expenditure the more will be the demand for money for transaction motive and vice-versa. For example, demand for money for transaction motive is more for a govt. servant on the first of each month and as the length of time gets shorter and shorter the demand for money keeps on falling.

Demand for money for transaction motive in aggregate is a function of national income. The higher the level of national income more will be the money demanded for transaction motive and vice-versa.

Precautionary Motive
Individuals, households and firms hold cash to meet their emergent needs. Individuals’ demand for money for precautionary motive is for shopping in emergency. Households also cash to meet their unforeseen needs, for example, medical treatment, repair of the house etc. Likewise firms hold cash for emergency because they can face windfall losses or there can be sudden break-down of machinery in future.

Total amount of money demanded by individual’s households and firms for precautionary motive is a function of national income. If the level of national income in a country is high demand for money precautionary motive will increase and vice-versa.

Speculative Motive
Investors demand money for speculative motive. They need cash in hand to invest in bonds and other securities to make profit. When investors speculate that rate of interest will fall in future due to which bond prices are likely to increase, they purchase bonds now to sell them at higher prices in future. In this way they make profit if their speculation proves to be true. Conversely, if they expect that rate of interest will rise in future due to which bond prices will fall, they sell bonds now to protect themselves from losses in future. Thus, liquidity preference or demand for money for speculative motive is a function of rate of interest. There is negative correlation between the two i.e. if current rate of interest is high (due to which bond prices are low) demand for money for speculative motive remains low and vice versa.

Transaction and precautionary motives are functions of national income and therefore they do not play any role in the determination of rate of interest. Only speculative motive plays its role in the determination of rate of interest. Liquidity preference curve slope down from left to right Since there is negative co-relationship between the two.