The equilibrium rate of interest in the Liquidity Preference Theory is determined by:
A) Demand for investment and the volume of savings
B) Demand for loanable funds and the supply of loanable funds
C) The transactions, precautionary and speculative demands for money
D) The demand for money and the volume of savings
E) The total demand for money and the supply of money

Question

Quizplus · Accepted Answer

The Liquidity Preference Theory, proposed by John Maynard Keynes, suggests that the equilibrium rate of interest is determined by the total demand for money (which includes transactions, precautionary, and speculative motives) and the supply of money set by the central bank or monetary authority.

The Equilibrium Rate of Interest in the Liquidity Preference Theory