According to liquidity preference theory, the money-supply curve would shift if the Fed
A) engaged in open-market operations.
B) increased money demand.
C) increase the real income.
D) did any of the above.

Question

Quizplus · Accepted Answer

Liquidity preference theory suggests that the demand for money is influenced by the interest rate. If the Fed engages in open-market operations to buy or sell government securities, this affects the supply of money in the economy, which, in turn, can impact the interest rate. Therefore, a change in the money supply would cause the money-supply curve to shift. Option B is incorrect because an increase in money demand would not shift the money-supply curve but would instead affect the interest rate. Option C is also incorrect because an increase in real income would not cause a shift in the money-supply curve.

According to Liquidity Preference Theory, the Money-Supply Curve Would Shift