More realistically, the liquidity function is not ______ but a(n) ______ function of the demand for real balances based on changes in the ______.
A) constant; decreasing; nominal rate of interest
B) increasing; constant; real rate of interest
C) decreasing; increasing; level of real income
D) constant; increasing; real rate of interest

Question

Quizplus · Accepted Answer

The liquidity function is not constant but an increasing function of the demand for real balances based on changes in the real rate of interest. This reflects the idea that as the real rate of interest increases, the opportunity cost of holding money (rather than investing it) increases, thus increasing the demand for liquidity.

More Realistically, the Liquidity Function Is Not ______ but A(n)