According to the theory of liquidity preference, if the demand for real money balances exceeds the supply of real money balances, individuals will:
A) sell interest-earning assets in order to obtain non-interest-bearing money.
B) purchase interest-earning assets in order to reduce holdings of non-interest-bearing money.
C) purchase fewer goods and services.
D) be content with their portfolios.

Question

Quizplus · Accepted Answer

According to the theory of liquidity preference, when the demand for real money balances surpasses the supply, individuals will try to obtain non-interest-bearing money by selling their interest-earning assets. This will increase the supply of interest-earning assets and lower their prices while at the same time increasing the demand for money and raising its price.

According to the Theory of Liquidity Preference, If the Demand