The theory of liquidity preference is most helpful in understanding
A)the wealth effect.
B)the exchange-rate effect.
C)the interest-rate effect.
D)misperceptions theory.

Question

Quizplus · Accepted Answer

The theory of liquidity preference explains the relationship between the interest rate and the demand for money. As interest rates increase, the demand for money decreases as people move their funds into interest-bearing assets. As interest rates decrease, the demand for money increases as people prefer the liquidity of holding cash rather than earning a low interest rate. Therefore, the theory of liquidity preference is most helpful in understanding the interest-rate effect.

The Theory of Liquidity Preference Is Most Helpful in Understanding