By September there was a rush to liquidity as investors sought safety in cash, Treasury bills, and bank deposits. In Keynes‘s theory, this is a classic shift in liquidity preference. In terms of the [5-LM model this rush to liquidity shows up as a shift to the left in the LM schedule. The interest rate is pushed up, and income declines. With a massive shock such as the financial crisis these effects will be large.
There are also secondary effects suggested by the model. As explained in Chapter 5, although Keynes considered income the dominant variable determining consumption, later economists have examined the effect of wealth on consumption. In the financial crisis as the value of risky assets declined, consumers cut back Spending. An example