According to liquidity preference theory,if the price level
A)fell,the interest rate would rise,and induce investment spending to rise.
B)fell,the interest rate would fall,and induce investment spending to fall.
C)rose,the interest rate would rise,and induce investment spending to fall.
D)rose,the interest rate would fall,and induce investment spending to rise.

Question

Quizplus · Accepted Answer

Liquidity preference theory suggests that as the price level rises, people will demand more money to hold as precautionary balances, meaning they will choose to save more and spend less. This increase in the demand for money will drive up the interest rate, as people will be willing to pay more to borrow money. As interest rates rise, firms will reduce investment spending due to the increased cost of borrowing, leading to a decrease in overall investment. Thus, as the price level rises, the interest rate will rise and induce investment spending to fall.

According to Liquidity Preference Theory,if the Price Level