In the liquidity-preference model, a decrease in the money supply causes
A)the nominal interest rate to increase and the equilibrium quantity of money to decrease.
B)the nominal interest rate to increase and the equilibrium quantity of money to remain unchanged.
C)the nominal interest rate to decrease and the equilibrium quantity of money to remain unchanged.
D)both the nominal interest rate and the equilibrium quantity of money to decrease.

Question

Quizplus · Accepted Answer

According to the liquidity-preference model, a decrease in the money supply will lead to an increase in the nominal interest rate and a decrease in the equilibrium quantity of money. This is because when the money supply decreases, people will be willing to pay higher interest rates to obtain the limited available funds, leading to an increase in the nominal interest rate. At the same time, the decrease in the money supply will make it harder for people to get the amount of money they need, which means that the equilibrium quantity of money will decrease.

In the Liquidity-Preference Model, a Decrease in the Money Supply