The liquidity preference theory holds that interest rates are determined by the:
A)supply of and demand for moneyinvestor preference for short-term securties
B)supply of and demand for loanable fundsinvestor preference for higher-yielding long-term securities.
C)"flow" of funds over time
D)"flow" of bank credit over time

Question

Quizplus · Accepted Answer

The liquidity preference theory posits that interest rates are determined by the supply of and demand for money, as well as investor preference for short-term securities. This theory was developed by John Maynard Keynes and suggests that individuals and businesses need liquidity, or access to cash or funds, to cover unexpected expenses or other needs. Therefore, they may be willing to pay higher interest rates for more liquid assets, such as short-term securities, and as a result, the demand for these securities will increase, leading to higher interest rates. On the other hand, if there is excess money supply and a low demand for short-term securities, interest rates will decrease.

The Liquidity Preference Theory Holds That Interest Rates Are Determined