According to the theory of liquidity preference,an increase in the price level causes the
A)interest rate and investment to rise.
B)interest rate and investment to fall.
C)interest rate to rise and investment to fall.
D)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 leads to a higher demand for money, which leads to a rise in the interest rate. As the interest rate increases, the cost of borrowing for investment purposes also increases, which tends to reduce the level of investment. Therefore, an increase in the price level causes the interest rate to rise and investment to fall.

According to the Theory of Liquidity Preference,an Increase in the Price