The theory of liquidity preference illustrates the principle that
A)monetary policy can be described either in terms of the money supply or in terms of the interest rate.
B)monetary policy can be described either in terms of the exchange rate or the interest rate.
C)monetary policy must be described in terms of the money supply.
D)monetary policy must be described in terms of the interest rate.

Question

Quizplus · Accepted Answer

The theory of liquidity preference, proposed by Keynes, suggests that the interest rate is determined by the supply and demand for money. This implies that monetary policy can be described in terms of either the money supply or the interest rate, as changes in the money supply affect interest rates.

The Theory of Liquidity Preference Illustrates the Principle That