According to the liquidity preference model, the equilibrium interest rate is determined by the:
A) supply of and demand for loanable funds.
B) supply of and demand for money.
C) level of investment spending and saving.
D) International Monetary Fund.

Question

Quizplus · Accepted Answer

The liquidity preference model states that the equilibrium interest rate is determined by the supply of and demand for money. This is based on the idea that individuals and businesses have a preference for holding money in a liquid form (cash, bank deposits, etc.) rather than investing it in illiquid assets such as bonds or stocks. The demand for money is influenced by factors such as income, interest rates, and expectations about the future, while the supply of money is controlled by central banks such as the Federal Reserve. Therefore, the equilibrium interest rate is the rate at which the supply of money equals the demand for money, and it is determined by the interaction of these two factors.

According to the Liquidity Preference Model, the Equilibrium Interest Rate