According to liquidity preference theory, if the price level decreases, then Select one: a. the interest rate falls because money demand shifts left. b. the interest rate rises because money supply shifts right. c. the interest rate rises because money supply shifts left. d. the interest rate falls because money demand shifts right.

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19-11-2021
Business

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According to liquidity preference theory, if the price level decreases, then Select one: a. the interest rate falls because money demand shifts left. b. the interest rate rises because money supply shifts right. c. the interest rate rises because money supply shifts left. d. the interest rate falls because money demand shifts right.

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Tundexi Tundexi · Answer 1 · 2021-12-02T10:35:59+01:00

The liquidity preference theory states that when price level decrease, then the transaction demand for money will decrease, thus, shifting the demand curve to the left which decreases the interest rate.

Basically, the liquidity preference theory emphasize that interest rate is the price for money.

The theory emphasize that if price level decrease, then, transaction demand for money will decrease, thus, shifting the demand curve to the left which decreases the interest rate.

Therefore, the correct option is A. because if the price level decreases, the interest rate falls because money demand shifts left.

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