According to the liquidity preference model:
A) an increase in the money supply lowers the equilibrium rate of interest.
B) a decrease in the money supply lowers the equilibrium rate of interest.
C) the money supply curve is a horizontal line.
D) the demand for money curve is a vertical line.

Question

Quizplus · Accepted Answer

According to the liquidity preference model, an increase in the money supply leads to a decrease in the equilibrium rate of interest. This is because as the supply of money increases, individuals and firms are willing to lend money at lower interest rates, whereas if the supply of money decreases, lenders demand higher interest rates to compensate for the reduced availability of funds. The demand for money curve is downward sloping, while the money supply curve is vertical.

According to the Liquidity Preference Model