According to liquidity preference theory,equilibrium in the money market is achieved by adjustments in
A)the price level.
B)the interest rate.
C)the exchange rate.
D)real wealth.

Question

Quizplus · Accepted Answer

The liquidity preference theory suggests that equilibrium in the money market is achieved by adjusting the interest rate. When the demand for money exceeds the supply, individuals and firms are willing to pay a higher price (i.e., interest rate) to hold onto their cash balances. As a result, the interest rate increases, which decreases the quantity of money demanded and increases the quantity of money supplied until equilibrium is reached. Similarly, if the supply of money exceeds demand, individuals and firms will demand a lower interest rate to hold onto their cash balances, thus pushing the interest rate down until equilibrium is achieved. Therefore, the correct answer is B, the interest rate.

According to Liquidity Preference Theory,equilibrium in the Money Market Is