In liquidity-preference theory, an increase in the interest rate decreases the quantity of money demanded, but does not shift the money-demand curve.

Question

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According to liquidity-preference theory, the money-demand curve represents the relationship between the interest rate and the quantity of money demanded, holding all other factors constant. Therefore, a change in the interest rate would result in movement along the money-demand curve, but would not shift the curve itself. So, an increase in the interest rate would lead to a decrease in the quantity of money demanded along the same money-demand curve.

In Liquidity-Preference Theory, an Increase in the Interest Rate Decreases