According to the theory of liquidity preference,a decrease in income will ______ interest rates,and according to the quantity equation (assuming velocity is not constant),a decrease in interest rates will ______ income.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Question

Quizplus · Accepted Answer

According to the theory of liquidity preference, a decrease in income will decrease the demand for money, which will lower interest rates. On the other hand, according to the quantity equation, a decrease in interest rates will decrease the demand for money, resulting in an increase in income. Therefore, the answers are opposite, and the most appropriate choice is C.

According to the Theory of Liquidity Preference,a Decrease in Income