According to liquidity preference theory,the money-supply curve would shift rightward
A) if the money demand curve shifted right.
B) if the Federal Reserve chose to increase money supply.
C) if the interest rate increased.
D) All of the above are correct.

Question

Quizplus · Accepted Answer

According to liquidity preference theory, the money-supply curve would shift rightward if the Federal Reserve chose to increase money supply. This is because an increase in money supply would lead to a decrease in the interest rate, which in turn would increase demand for money and shift the money demand curve rightward. Therefore, choice B is the correct answer. The other options are incorrect because an increase in interest rate would actually shift the money demand curve leftward, and the shift in the money demand curve alone would not affect the money-supply curve.

According to Liquidity Preference Theory,the Money-Supply Curve Would Shift Rightward