According to the theory of liquidity preference,a decrease 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, a decrease in the price level leads to a decrease in the demand for money as people have more cash on hand. As a result, the interest rate falls to encourage investment and borrowing. This means that investment will rise as a result of the lower interest rates. Therefore, choice D is the best answer.

According to the Theory of Liquidity Preference,a Decrease in the Price