With the real money supply held constant, the theory of liquidity preference implies that a higher income level will be consistent with:
A) no change in the interest rate.
B) a lower interest rate.
C) a higher interest rate.
D) first a lower and then a higher interest rate.

Question

Quizplus · Accepted Answer

According to the theory of liquidity preference, as income level increases, the demand for money also increases. This creates upward pressure on interest rates because individuals and firms are willing to pay more for money to finance their increased economic activity. Therefore, a higher income level is consistent with a higher interest rate.

With the Real Money Supply Held Constant, the Theory of Liquidity