According to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?
A) interest rate
B) exchange rate
C) gross domestic product
D) the consumer price index

Question

Quizplus · Accepted Answer

The theory of liquidity preference, developed by John Maynard Keynes, suggests that the interest rate adjusts to balance the supply and demand for money. As the demand for money increases, individuals and institutions are willing to pay higher interest rates to obtain the funds they require. As a result, the interest rate rises, reducing the demand for money, and vice versa. Therefore, A is the correct choice. B, C, and D are not related to the theory of liquidity preference.

According to the Theory of Liquidity Preference, Which Variable Adjusts