According to liquidity preference theory,an increase in the price level shifts the
A)money demand curve rightward,so the interest rate increases.
B)money demand curve rightward,so the interest rate decreases.
C)money demand curve leftward,so the interest rate decreases.
D)money demand curve leftward,so the interest rate increases.

Question

Quizplus · Accepted Answer

According to liquidity preference theory, an increase in the price level leads to an increase in the demand for money, since people need more money to purchase goods and services at the higher prices. This, in turn, shifts the money demand curve to the right, leading to an increase in the interest rate. Therefore, the best choice is A.

According to Liquidity Preference Theory,an Increase in the Price Level