According to liquidity preference theory, investment spending would rise if the price level
A)fell, making the interest rate rise.
B)fell, making the interest rate fall.
C)rose, making the interest rate rise.
D)rose, making the interest rate fall.

Question

Quizplus · Accepted Answer

According to liquidity preference theory, people hold money for three reasons: transactions, precautionary, and speculative. The speculative demand for money is based on the expectation of future interest rates. If people expect interest rates to fall in the future, they will hold less money and buy more bonds, causing the interest rate to rise. On the other hand, if people expect interest rates to rise in the future, they will hold more money and sell bonds, causing the interest rate to fall. Therefore, investment spending would rise if the price level fell, making the interest rate fall. Hence, the correct option is B.

According to Liquidity Preference Theory, Investment Spending Would Rise If