According to the liquidity preference model, if the Federal Reserve increases the money supply, the equilibrium interest rate _____, and this leads to a(n) _____ in the quantity demanded of nonmonetary interest-bearing financial assets.
A) rises; increase
B) falls; decrease
C) rises; decrease
D) falls; increase

Question

Quizplus · Accepted Answer

According to the liquidity preference model, when the Federal Reserve increases the money supply, the equilibrium interest rate falls because there is more money available for lending. This decrease in interest rates makes nonmonetary interest-bearing financial assets (like bonds) less attractive compared to holding money, leading to an increase in the quantity demanded of these assets as their prices adjust to the new lower interest rates.

According to the Liquidity Preference Model, If the Federal Reserve