Question

In his liquidity preference framework, keynes assumed that money has a zero rate of return; thus, when interest rates ________ the expected return on money falls relative to the expected return on bonds, causing the demand for money to ________.

Answer 1

............. thus, when interest rate RISE the expected return on money falls relative to the expected returns on bonds, causing the demand for money to FALL. Keynes' liquidity theory holds that money is the most liquid asset and assets are believed to be in two forms, which are money and bonds.