how does fiscal policy influence liquidity preferences 
fiscal policy uses government spending and tax policies to influence economic conditions expansionary fiscal policy increases government spending or cuts taxes and can lower liquidity preference by stimulating economic growth and confidence this can lead to lower interest rates contractionary fiscal policies often raise liquidity preference because of heightened uncertainty putting upward pressure on rates the bottom lineliquidity preference theory attempts to explain the relationship between liquidity interest rates and economic stability it highlights how individual and institutional behaviors regarding liquidity can occur within financial markets liquidity preference theory originated in the work of keynes and continues to serve as a pivotal lens through which to consider monetary economics phenomena a grasp of liquidity preference by investors can be productive in making better asset allocation and risk management decisions it sheds light on how monetary policies might sway interest rates and market stability for policymakers 