The theory which argues that the risk-free interest rate is determined by the interaction of the demand for money and the nation's supply of money is known as the:
A) Classical Theory of Interest Rates
B) Liquidity Preference Theory of Interest Rates
C) Loanable Funds Theory of Interest
D) Efficient Markets Theory
E) None of the above

Question

Quizplus · Accepted Answer

The Liquidity Preference Theory of Interest Rates, proposed by John Maynard Keynes, suggests that the interest rate is determined by the demand for liquidity (holding money) and the supply of money by the central bank. This theory emphasizes the role of money and liquidity preferences in the economy, contrasting with theories that focus solely on the supply and demand for loans or investments.

The Theory Which Argues That the Risk-Free Interest Rate Is