If bond yields rise by 1% and the return on money rises by 1%, the predictions for the change in money demand made by Keynes's and Friedman's models are the same.

Question

Quizplus · Accepted Answer

Keynes's liquidity preference theory suggests that an increase in interest rates (or bond yields) would decrease the demand for money as people prefer to hold bonds or other interest-bearing assets. In contrast, Friedman's quantity theory posits that changes in money demand are primarily driven by changes in income and prices, not interest rates. Therefore, their predictions regarding the change in money demand in response to a simultaneous rise in bond yields and the return on money would not be the same.

If Bond Yields Rise by 1% and the Return on Money