According to the theory of liquidity preference, what does a decrease in the price level cause the interest rate and investment to do?
A) It causes both the interest rate and investment to rise.
B) It causes both the interest rate and investment to fall.
C) It causes the interest rate to rise and investment to fall.
D) It causes the interest rate to fall and investment to rise.

Question

Quizplus · Accepted Answer

According to the theory of liquidity preference, a decrease in the price level causes an increase in the demand for money, as people and businesses hold onto cash instead of spending it due to the lower prices. This increased demand for money causes the interest rate to fall. However, a lower interest rate makes investment more attractive, leading to an increase in investment. Therefore, a decrease in the price level causes the interest rate to fall and investment to rise.

According to the Theory of Liquidity Preference, What Does a Decrease