The liquidity preference theory holds that interest rates are determined by the:
A) investor preference for short-term securties
B) investor preference for higher-yielding long-term securities.
C) “flow” of funds over time
D) “flow” of bank credit over time

Question

The liquidity preference theory holds that interest rates are determined by the:
A)	investor preference for short-term securties
B)	investor preference for higher-yielding long-term securities.
C)	“flow” of funds over time
D)	“flow” of bank credit over time

Quizplus · Accepted Answer

The liquidity preference theory suggests that investors have a preference for holding more liquid, short-term securities rather than long-term securities, which can limit their ability to access their funds quickly. As a result, investors may require a higher rate of return to be incentivized to hold long-term securities, and interest rates are therefore largely determined by investor preferences for shorter-term securities.

The Liquidity Preference Theory Holds That Interest Rates Are Determined