According to the theory of liquidity preference, which of the following variables adjusts to balance the supply and demand for money?
A)interest rate
B)money supply
C)quantity of output
D)price level

Question

Quizplus · Accepted Answer

According to the theory of liquidity preference, the interest rate is the variable that adjusts to balance the supply and demand for money. When there is excess supply of money, individuals and firms will want to hold less money, and will lend it out at lower interest rates, pushing down the interest rate. Conversely, when there is excess demand for money, individuals and firms will want to hold more money, and will be willing to pay higher interest rates to obtain it, pushing up the interest rate. Therefore, the interest rate serves as the price of money in the money market, balancing the supply and demand.

According to the Theory of Liquidity Preference, Which of the Following