According to liquidity-preference theory, if the price level decreases, how do the equilibrium interest rate and the aggregate quantity of goods change?
A) The interest rate and the quantity demanded rise.
B) The interest rate rises and the quantity demanded falls.
C) The interest rate falls and the quantity demanded rises.
D) The interest rate and the quantity demanded fall.

Question

Quizplus · Accepted Answer

According to the liquidity-preference theory, if the price level decreases, people need less money for transactions, which increases the supply of money in terms of its purchasing power. This leads to a lower interest rate because people are more willing to lend excess money. Lower interest rates make borrowing cheaper, encouraging investment and consumption, which increases the aggregate quantity of goods demanded.

According to Liquidity-Preference Theory, If the Price Level Decreases, How