The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will:
A) lower the interest rate.
B) raise the interest rate.
C) have no effect on the interest rate.
D) first lower and then raise the interest rate.

Question

Quizplus · Accepted Answer

The theory of liquidity preference states that individuals hold money for transactions and speculative purposes. As the real money supply increases, there is a greater supply of money available for individuals to hold for transactions and speculative purposes, meaning that they do not need to borrow as much money. This leads to a decrease in the demand for loanable funds, which in turn lowers the interest rate.

The Theory of Liquidity Preference Implies That, Other Things Being