According to liquidity preference theory,
A)an increase in the interest rate reduces the quantity of money demanded.This is shown as a movement along the money-demand curve.An increase in the price level shifts money demand to the right.
B)an increase in the interest rate increases the quantity of money demanded.This is shown as a movement along the money-demand curve.An increase in the price level shifts money demand leftward.
C)an increase in the price level reduces the quantity of money demanded.This is shown as a movement along the money-demand curve.An increase in the interest rate shifts money demand rightward.
D)an increase in the price level increases the quantity of money demanded.This is shown as a movement along the money-demand curve.An increase in the interest rate shifts money demand leftward.

Question

Quizplus · Accepted Answer

According to the liquidity preference theory, an increase in interest rates will reduce the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level will shift money demand to the right (not leftward). Therefore, option A is the correct answer.

According to Liquidity Preference Theory