According to liquidity preference theory, if the price level A. fell, the interest rate would fall, and induce investment spending to fall. B. rose, the interest rate would fall, and induce investment spending to rise. C. rose, the interest rate would rise, and induce investment spending to fall.

Question

Lorelei

Business

14 December, 21:30

According to liquidity preference theory, if the price level A. fell, the interest rate would fall, and induce investment spending to fall. B. rose, the interest rate would fall, and induce investment spending to rise. C. rose, the interest rate would rise, and induce investment spending to fall.

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Ashly Wise · Answer 1

The correct answer is: fell making the interest rate fall.

Explanation:

The preference for liquidity is a recurring expression in the study of economics, especially important in Keynesian theory and that assumes that people consider it better to have their savings in liquid form, that is, as money.

This concept, which is very recurrent in macroeconomics, assumes the existence of an outstanding trend in human and rational behavior through which individuals prefer to have their assets accessible and liquid compared to other possibilities. Originally, the definition of liquidity preference was coined by Keynes when explaining the concept of monetary demand and its mode of action.

This theory suggests that there is a direct relationship between interest rates or rates and people's preferences in terms of liquidity, because both maintaining money effectively and not doing so entail certain costs for these. In other words, saving money can translate into financial gains.