The liquidity preference theory holds that interest rates are determined by the:
A) investor preference for short-term securities
B) investor preference for higher-yielding long-term securities.
C) "flow" of funds over time
D) "flow" of bank credit over time

Question

Quizplus · Accepted Answer

The liquidity preference theory holds that interest rates are determined by the demand for money as an asset. Investors have a preference for liquid assets, such as short-term securities, and therefore require a higher return for holding longer-term securities. As demand for short-term securities increases, interest rates rise, reflecting the higher cost of borrowing money. Therefore, investor preference for short-term securities is the primary determinant of interest rates according to the liquidity preference theory.

The Liquidity Preference Theory Holds That Interest Rates Are Determined