The theory of liquidity preference implies that the quantity of real money balances demanded is:
A) negatively related to both the interest rate and income.
B) positively related to both the interest rate and income.
C) positively related to the interest rate and negatively related to income.
D) negatively related to the interest rate and positively related to income.

Question

Quizplus · Accepted Answer

The theory of liquidity preference, proposed by John Maynard Keynes, suggests that people prefer to hold onto cash (or liquid assets) rather than invest in securities when interest rates are low. Therefore, the demand for real money balances is negatively related to the interest rate (since higher interest rates make holding money less attractive) and positively related to income (since higher income increases the demand for transactions, thus increasing the demand for money).

The Theory of Liquidity Preference Implies That the Quantity of Real