Asked by George Maillard Jr. on Jun 24, 2024
Verified
According to liquidity preference theory, if the price level decreases, then
A) the interest rate falls because money demand shifts right.
B) the interest rate falls because money demand shifts left.
C) the interest rate rises because money supply shifts right.
D) the interest rate rises because money supply shifts left.
Liquidity Preference Theory
Liquidity Preference Theory is a concept in Keynesian economics proposing that individuals prefer to hold their wealth in liquid form for convenience and security, influencing interest rates and economic activity.
Price Level
An index that measures the average of current prices across the entire spectrum of goods and services produced in the economy.
Interest Rate
The amount charged by a lender to a borrower for the use of assets, expressed as a percentage of the principal, usually on an annual basis.
- Understand the effects of price level fluctuations on the demand and supply for money.
Verified Answer
ZP
ZIARA PEEBLESJun 24, 2024
Final Answer :
B
Explanation :
When the price level decreases, individuals require less money for transactions, leading to a leftward shift in the money demand curve. This reduces the interest rate as there is less demand for money relative to the supply.
Learning Objectives
- Understand the effects of price level fluctuations on the demand and supply for money.