Question

According to liquidity preference theory, the money-supply curve would

a) if the money demand curve shifted right.
b) if the federal reserve chose to increase the money supply.
c) if the interest rate increased.
d) if the price level increased.

Answer 1

The money-supply curve would shift to the right if the money demand curve shifted right, according to the liquidity preference theory. Therefore the correct answer is a) if the money demand curve shifted right.

Step-by-step explanation:

The Liquidity Preference Theory, developed by John Maynard Keynes, explains the relationship between the demand for money and the interest rate. According to this theory, the money-supply curve would shift to the right if the money demand curve shifted right. When there is an increase in the demand for money, individuals and businesses will want to hold more money, which would shift the money-supply curve to meet the increased demand.