The liquidity preference theory holds that interest rates are determined by the:
A)supply of and demand for money
B)supply of and demand for loanable funds
C)"flow" of funds over time
D)"flow" of bank credit over time

Question

Quizplus · Accepted Answer

The liquidity preference theory is based on the idea that individuals prefer to hold liquid assets (such as money) rather than illiquid assets (such as bonds). Therefore, the interest rate that individuals demand for holding money will affect the overall supply and demand for money, which in turn will determine the interest rate level in the economy. Thus, interest rates are determined by the supply of and demand for money.

The Liquidity Preference Theory Holds That Interest Rates Are Determined