Because interest rates have substantial fluctuations,the ________ theory of the demand for money indicates that velocity has substantial fluctuations as well.
A)classical
B)Cambridge
C)liquidity preference
D)Pigouvian

Question

Quizplus · Accepted Answer

The liquidity preference theory of the demand for money developed by John Maynard Keynes focuses on the desire of individuals to hold money as a store of value in addition to its medium of exchange role. According to this theory, the demand for money is a function of the interest rate, income level, and the degree of uncertainty in the economy. Therefore, if interest rates have substantial fluctuations, the demand for money will also fluctuate, leading to substantial changes in velocity. The classical and Cambridge theories of the demand for money are more focused on the transactional role of money and assume a stable velocity of money. The Pigouvian theory is related to externalities and does not directly apply to the demand for money.

Because Interest Rates Have Substantial Fluctuations,the ________ Theory of the Demand