The liquidity-preference theory assumes that the interest rate adjusts to balance the money demand and supply, where the money supply is arbitrarily determined by the central bank. However, we have previously learned that the central bank controls the money supply precisely by changing the interest rate. How do you reconcile the liquidity-preference theory with using the interest rate as a monetary policy tool?

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The Answer of The liquidity-preference theory assumes that the interest rate adjusts to balance the money demand and supply, where the money supply is arbitrarily determined by the central bank. However, we have previously learned that the central bank controls the money supply precisely by changing the interest rate. How do you reconcile the liquidity-preference theory with using the interest rate as a monetary policy tool?

The Liquidity-Preference Theory Assumes That the Interest Rate Adjusts to Balance