According to the theory of liquidity preference, what does an increase in the price level cause the interest rate and investment to do?
A) It causes both the interest rate and investment to rise.
B) It causes both the interest rate and investment to fall.
C) It causes the interest rate to rise and investment to fall.
D) It causes the interest rate to fall and investment to rise.

Question

Quizplus · Accepted Answer

According to the theory of liquidity preference, an increase in the price level causes an increase in money demand, leading to an increase in the interest rate. As the interest rate increases, investment decreases due to the higher cost of borrowing. Therefore, an increase in the price level causes the interest rate to rise and investment to fall.

According to the Theory of Liquidity Preference, What Does an Increase