The theory of liquidity preference assumes that the nominal supply of money is determined by which of the following?
A) the level of real GDP
B) the rate of inflation
C) the Ministry of Finance
D) the central bank

Question

Quizplus · Accepted Answer

The theory of liquidity preference, developed by John Maynard Keynes, assumes that the nominal supply of money is determined by the central bank through its control over the money supply and interest rates. The theory states that interest rates adjust to balance the demand for money (for transactions, precautionary, and speculative motives) with the supply of money. This helps to explain fluctuations in the economy and the effects of monetary policy on aggregate demand.

The Theory of Liquidity Preference Assumes That the Nominal Supply