According to the liquidity preference model, if the interest rate rises above its equilibrium value, the quantity demanded of nonmonetary interest-bearing financial assets _____, and this leads to a _____ in the interest rate.
A) decreases; rise
B) increases; fall
C) decreases; fall
D) increases; rise

Question

Quizplus · Accepted Answer

When the interest rate rises above its equilibrium, the quantity demanded of nonmonetary interest-bearing financial assets increases because they become more attractive compared to holding money. This increased demand for such assets puts downward pressure on interest rates, leading them to fall back towards equilibrium.

According to the Liquidity Preference Model, If the Interest Rate