The liquidity preference model uses the demand for and supply of money to determine:
A) GDP.
B) the price level.
C) the interest rate.
D) nominal output.

Question

Quizplus · Accepted Answer

The liquidity preference model, developed by John Maynard Keynes, emphasizes the importance of the demand for money as a determinant of the interest rate. The model argues that people hold money not only for transactions but also as a form of wealth. When the demand for money increases, ceteris paribus, the interest rate will also increase to encourage saving and discourage spending. Conversely, when the supply of money increases, ceteris paribus, the interest rate will decrease. Therefore, the liquidity preference model determines the interest rate through the interaction of the demand and supply of money, making choice (C) the correct answer.

The Liquidity Preference Model Uses the Demand for and Supply