The liquidity-preference model assumes that the amount people spend depends on
A)their real incomes and the incomes of other people around them.
B)the cost of withdrawing money from an ATM.
C)the probability of theft and loss of money.
D)their real incomes and prices of goods and services.

Question

Quizplus · Accepted Answer

The liquidity-preference model is based on the assumption that people hold their wealth in two forms: money and bonds. The model assumes that people determine the proportion of their wealth that they want to hold in cash (liquidity preference) and the proportion they want to hold in the form of bonds (interest rate preference). The amount people spend depends on their real incomes and the prices of goods and services, which are reflected in the interest rate. Therefore, choice D is the correct answer.

The Liquidity-Preference Model Assumes That the Amount People Spend Depends