Question

A surplus or shortage in the money market is eliminated by adjustments in the price level according to classical theory, but not liquidity preference theory. liquidity preference theory, but not classical theory. neither liquidity preference theory nor classical theory. both liquidity preference theory and classical theory.

Answer 1

The correct answer is option A.

Step-by-step explanation:

According to the classical theory, the quantity of money is directly related to price level. So, any shortage or surplus in the money market can be corrected by increasing or decreasing price level.

According to the liquidity preference theory, however, money is demanded for transactionary, precautionary and speculative motive. So, only price level does not affects the quantity of money. Interest rates also effect the demand for money.

So, option A is the correct answer.