According to liquidity preference theory,if the price level increases,then the equilibrium interest rate
A)rises and the aggregate quantity of goods demand rises.
B)rises and the aggregate quantity of goods demanded falls.
C)falls and the aggregate quantity of goods demanded rises.
D)falls and the aggregate quantity of goods demanded falls.

Question

Quizplus · Accepted Answer

According to liquidity preference theory, an increase in the price level leads to an increase in the demand for money, which in turn raises the interest rate to maintain equilibrium in the money market. As the interest rate rises, the cost of borrowing increases, which reduces the investment and consumption expenditures, resulting in a fall in the aggregate quantity of goods demanded. Hence, option B is the correct answer.

According to Liquidity Preference Theory,if the Price Level Increases,then the Equilibrium