Keynes's liquidity preference theory indicates that the demand for money
A)is purely a function of income,and interest rates have no effect on the demand for money.
B)is purely a function of interest rates,and income has no effect on the demand for money.
C)is a function of both income and interest rates.
D)is a function of both government spending and income.

Question

Quizplus · Accepted Answer

Keynes's liquidity preference theory posits that the demand for money is a function of both income and interest rates. As income increases, so does the demand for money, but as interest rates increase, the demand for money decreases, as individuals are more likely to hold onto their money in interest-bearing accounts. Therefore, Choice C is the best option. Choices A, B, and D all have incorrect explanations of Keynes's theory.

Keynes's Liquidity Preference Theory Indicates That the Demand for Money