John Maynard Keynes's liquidity preference theory suggests that the interest rate is determined by:
A) the supply of and demand for loanable funds.
B) aggregate supply and aggregate demand.
C) the commercial banks.
D) the supply of and demand for money.

Question

Quizplus · Accepted Answer

According to Keynes's liquidity preference theory, the interest rate is determined by the supply of and demand for money. The theory suggests that individuals and businesses prefer to hold their wealth in liquid assets, such as cash and bank deposits, rather than in illiquid assets, such as stocks and real estate. The demand for money is therefore influenced by the desire to hold liquid wealth. The supply of money is controlled by the central bank through its monetary policy, including setting interest rates. Therefore, the supply of and demand for money determine the interest rate.

John Maynard Keynes's Liquidity Preference Theory Suggests That the Interest