Over what period of time is the liquidity-preference theory most relevant, and what does it suppose?
A) short run; it supposes that the price level adjusts to bring money supply and money demand into balance
B) short run; it supposes that the interest rate adjusts to bring money supply and money demand into balance
C) long run; it supposes that the price level adjusts to bring money supply and money demand into balance
D) long run; it supposes that the interest rate adjusts to bring money supply and money demand into balance

Question

Quizplus · Accepted Answer

The liquidity-preference theory is most relevant in the short run, as it focuses on the demand for money as a liquid asset in the current period. It supposes that the interest rate adjusts to bring money supply and money demand into balance, with individuals and firms holding money for transactional and speculative purposes. In the long run, the theory becomes less relevant as expectations adjust and the price level becomes more flexible. Therefore, choice B is the best answer.

Over What Period of Time Is the Liquidity-Preference Theory Most