According to liquidity-preference theory, if the price level increases, how do the equilibrium interest rate and the aggregate quantity of goods change?
A) The interest rate and the quantity demanded rise.
B) The interest rate rises and the quantity demanded falls.
C) The interest rate falls and the quantity demanded rises.
D) The interest rate and the quantity demanded fall.

Question

Quizplus · Accepted Answer

According to liquidity-preference theory, an increase in the price level leads to an increase in the demand for money, which leads to a higher equilibrium interest rate. This higher interest rate reduces investment and consumption spending, resulting in a decrease in the aggregate quantity of goods demanded. Therefore, the correct choice is B - the interest rate rises and the quantity demanded falls.

According to Liquidity-Preference Theory, If the Price Level Increases, How