According to liquidity preference theory,as real income increases,so does ________.
A)the supply of real money balances
B)the demand for real money balances
C)the real interest rate
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

According to liquidity preference theory, as real income increases, the demand for real money balances also increases. This is because individuals and firms want to hold more money to facilitate their transactions as their income and spending increase. As a result, the demand curve for money shifts to the right, leading to an increase in the equilibrium interest rate if the money supply remains constant. The increase in real money balances and the real interest rate are not necessarily correlated with the increase in real income. Therefore, choices A and C are incorrect, and choice D is incomplete.

According to Liquidity Preference Theory,as Real Income Increases,so Does ________