According to liquidity-preference theory, if the quantity of money demanded is greater than the quantity supplied, what will happen to the interest rate and the quantity of money demanded?
A) The interest rate will increase, and the quantity of money demanded will decrease.
B) The interest rate will increase, and the quantity of money demanded will increase.
C) The interest rate will decrease, and the quantity of money demanded will decrease.
D) The interest rate will decrease, and the quantity of money demanded will increase.

Question

Quizplus · Accepted Answer

According to liquidity-preference theory, if the quantity of money demanded is greater than the quantity supplied, there will be a shortage of money in the market, which will lead to an increase in the interest rate. This is because as people try to acquire the scarce money, they will be willing to pay a higher price (i.e., higher interest rate) for it. At the same time, the quantity of money demanded will decrease because people will be less willing to borrow money at a higher interest rate.

According to Liquidity-Preference Theory, If the Quantity of Money Demanded