According to the liquidity-preference theory, equilibrium in the money market is achieved by adjustments in which of the following?
A) government spending
B) the interest rate
C) the exchange rate
D) the inflation rate

Question

Quizplus · Accepted Answer

The liquidity-preference theory, developed by John Maynard Keynes, suggests that the interest rate is the key factor in achieving equilibrium in the money market. The theory proposes that people have a preference for liquid assets, such as money, rather than holding non-liquid assets like bonds. If the interest rate is too high, people will be less willing to hold money and will instead invest in bonds, reducing the demand and increasing the supply of money. This will lead to a decrease in the interest rate until equilibrium is reached, where the demand for money equals the supply of money. Therefore, adjustments in the interest rate are necessary to achieve equilibrium in the money market according to the liquidity-preference theory.

According to the Liquidity-Preference Theory, Equilibrium in the Money Market