The theory of liquidity preference implies that:
A)as the interest rate rises, the demand for real balances will fall.
B)as the interest rate rises, the demand for real balances will rise.
C)the interest rate will have no effect on the demand for real
D)balances. as the interest rate rises, income will rise.

Question

Quizplus · Accepted Answer

According to the theory of liquidity preference, as the interest rate rises, the opportunity cost of holding money increases, leading to a decrease in the demand for real balances. This is because individuals and firms would prefer to hold funds in interest-bearing assets rather than in non-interest bearing money balances.

The Theory of Liquidity Preference Implies That