In the liquidity-preference model, an increase in prices causes
A)both the nominal interest rate and the equilibrium quantity of money to decrease.
B)the nominal interest rate to increase and the equilibrium quantity of money to remain unchanged.
C)the nominal interest rate to decrease and the equilibrium quantity of money to remain unchanged.
D)both the nominal interest rate and the equilibrium quantity of money to increase.

Question

Quizplus · Accepted Answer

In the liquidity-preference model, an increase in prices decreases the real money supply, leading to an increase in the nominal interest rate to balance money supply with money demand. The equilibrium quantity of money itself does not change; it is the value of money in terms of goods and services that effectively decreases.

In the Liquidity-Preference Model, an Increase in Prices Causes