According to the theory of liquidity preference,which variable adjusts to balance the supply and demand for money?
A) interest rate
B) exchange rate
C) quantity of output
D) price level

Question

Quizplus · Accepted Answer

According to the theory of liquidity preference, the interest rate is the variable that adjusts to balance the supply and demand for money. As the demand for money increases, the interest rate rises to encourage people to save more and borrow less, reducing demand. Conversely, as the supply of money increases, the interest rate falls to encourage people to borrow more and save less, increasing demand.

According to the Theory of Liquidity Preference,which Variable Adjusts to Balance