Question

With the real money supply held constant, the theory of liquidity preference implies that a higher income level will be consistent with:________

a. a higher interest rate.
b. no change in the interest rate.
c. a lower interest rate.
d. first a lower and then a higher interest rate.

Answer 1

With the real money supply held constant, the theory of liquidity preference implies that a higher income level will be consistent with a higher interest rate .

Option A

Explanation:

The choice for liquidity in economic theory is money demand, which is seen as liquidity. In his novel The Central idea of Jobs, Interest, and Money, John Maynard Keynes created this concept to illustrate the determining of interest rates by market forces for money.

In practical terms, the faster the asset has become currency, the more liquid it becomes. The liquidity selection theory refers to cash demand as calculated by liquidity.

Example: a Treasury bill could pay a 2% interest rate, a Treasury bill of 10 years might pay a 4% interest rate, a Treasury bond of 30 years might pay a 6% interest rate. To order for a higher rate of return for the lender to surrender equity, they must agree that cash is stuck for a long period of time.