According to liquidity preference theory, if the price level decreases, then
A)the interest rate falls because money demand shifts right.
B)the interest rate falls because money demand shifts left.
C)the interest rate rises because money supply shifts right.
D)the interest rate rises because money supply shifts left.

Question

Quizplus · Accepted Answer

When the price level decreases, individuals require less money for transactions, leading to a leftward shift in the money demand curve. This reduces the interest rate as there is less demand for money relative to the supply.

According to Liquidity Preference Theory, If the Price Level Decreases