According to the theory of liquidity preference, the money demand curve is downward sloping, reflecting _____.
A)the opportunity cost holding money
B)the cost of buying goods and services
C)the effect of unforeseen inflation
D)the risk of holding money

Question

Quizplus · Accepted Answer

The theory of liquidity preference suggests that individuals hold money as a store of value to meet unexpected or emergency expenses. However, holding money incurs an opportunity cost in terms of foregone interest or potential returns from alternative investments. Therefore, the money demand curve slopes downward as people are willing to hold less money as the interest rate increases, which represents the opportunity cost of holding money.

According to the Theory of Liquidity Preference, the Money Demand