In expansions, according to the liquidity-preference model, the increase in ______leads to_____in the equilibrium nominal interest rate.
A)money supply; an increase
B)money supply; a decline
C)money demand; a decline
D)money demand; an increase

Question

Quizplus · Accepted Answer

According to the liquidity-preference model, in expansions there is an increase in income and thus an increase in the demand for money. This leads to an increase in the nominal interest rate, as individuals are willing to pay higher interest rates to lenders in exchange for the increased demand for money. Therefore, the increase in nominal interest rate is caused by an increase in money demand (choice D).

In Expansions, According to the Liquidity-Preference Model, the Increase in ______Leads