Assume the money market is initially in equilibrium. If the price level increases, according to liquidity-preference theory, what is in excess and for how long?
A) The supply of money is in excess until the interest rate increases.
B) The supply of money is in excess until the interest rate decreases.
C) The demand for money is in excess until the interest rate increases.
D) The demand for money is in excess until the interest rate decreases.

Question

Quizplus · Accepted Answer

When the price level increases, people will need more money for transactions, leading to an excess demand for money. According to liquidity-preference theory, this situation persists until the interest rate increases, which reduces the demand for money, restoring equilibrium.

Assume the Money Market Is Initially in Equilibrium