According to liquidity preference theory,a decrease in the price level shifts the
A)money demand curve right so the interest rate increases.
B)money demand curve right so the interest rate decreases.
C)money demand curve left so the interest rate decreases.
D)money demand curve left so the interest rate increases.

Question

Quizplus · Accepted Answer

According to liquidity preference theory, as the price level decreases, the quantity of money demanded decreases. This leads to a shift of the money demand curve to the left. As a result, there is excess supply of money in the market which reduces the interest rate. Therefore, the correct answer is option C, which states that the money demand curve shifts left and the interest rate decreases.

According to Liquidity Preference Theory,a Decrease in the Price Level