According to the liquidity preference theory, an increase in the overall price level of 10 percent
A)increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded.
B)decreases the equilibrium interest rate, which in turn increases the quantity of goods and services demanded.
C)increases the quantity of money supplied by 10 percent, leaving the interest rate and the quantity of goods and services demanded unchanged.
D)decreases the quantity of money demanded by 10 percent, leaving the interest rate and the quantity of goods and services demanded unchanged.

Question

Quizplus · Accepted Answer

The liquidity preference theory suggests that an increase in the overall price level leads to an increase in the demand for money. As people need more money to carry out transactions at higher prices, they hold onto more of their money, which decreases the supply of loanable funds. This, in turn, increases the equilibrium interest rate. Higher interest rates make borrowing more expensive, which can decrease investment and consumption, leading to a decrease in the quantity of goods and services demanded.

According to the Liquidity Preference Theory, an Increase in the Overall