Asked by Emily Gutierrez on Jun 30, 2024
Verified
Liquidity preference theory is most relevant to the
A) short run and supposes that the price level adjusts to bring money supply and money demand into balance.
B) short run and supposes that the interest rate adjusts to bring money supply and money demand into balance.
C) long run and supposes that the price level adjusts to bring money supply and money demand into balance.
D) long run and supposes that the interest rate adjusts to bring money supply and money demand into balance.
Liquidity Preference Theory
A theory suggesting that people prefer to hold their wealth in liquid form for ease of transactions and as a precaution against uncertainty.
Interest Rate
The cost of borrowing money or the return on investment for savings, typically expressed as a percentage of the principal amount per period.
Money Supply
The total amount of monetary assets available in an economy at a specific time, including cash, bank deposits, and other liquid assets.
- Acquire knowledge about the liquidity preference theory and its consequences on the money-supply curve trajectory.
Verified Answer
ZK
Zybrea KnightJul 03, 2024
Final Answer :
B
Explanation :
Liquidity preference theory, associated with John Maynard Keynes, posits that in the short run, the interest rate adjusts to equilibrate the money supply with the demand for money. This theory emphasizes the role of interest rates in balancing the supply and demand for liquid assets (money) in the economy.
Learning Objectives
- Acquire knowledge about the liquidity preference theory and its consequences on the money-supply curve trajectory.