Question

The theory of liquidity preference is largely at odds with the basic ideas of supply and demand. a. true b. false

Answer 1

The statement about the theory of liquidity preference is false, as it does not conflict with the ideas of supply and demand. Buyers can pay more, and sellers can sell for less than the equilibrium price for various reasons. A price floor does not shift demand or supply but sets a minimum legal price.

Step-by-step explanation:

The statement "The theory of liquidity preference is largely at odds with the basic ideas of supply and demand" is false. The theory of liquidity preference, developed by John Maynard Keynes, relates to the demand for money, particularly the decision to hold cash versus securities. This theory suggests that the interest rate is the 'price' of money that equates the supply of and demand for money. The higher the interest rate, the less money held for speculative reasons; the lower the interest rate, the more money held.

Regarding goods market behavior, the statement, "In the goods market, no buyer would be willing to pay more than the equilibrium price," is false because there are various reasons why buyers may be willing to pay more. For example, in the case of perceived shortages, necessity, or the desire for luxury or unique items, buyers may place a higher value on the product than the current market price.

Similarly, the statement, "In the goods market, no seller would be willing to sell for less than the equilibrium price," is also false. Sellers may be willing to sell at lower prices for reasons such as the need for liquidation, market entry pricing strategies, or competition.

A price floor is a minimum legal price set by the government. It does not shift the demand or supply curve; rather, it sets a minimum price that can be charged for a good or service. So, the correct answer to the question of what a price floor will usually shift is d. neither.

Answer 2

The theory of liquidity preference aligns with supply and demand but applies it to the money market. A price floor does not shift demand or supply but sets a minimum legal price for goods or services, potentially causing a surplus if above equilibrium price. Buyers might pay more and sellers might accept less than the equilibrium price due to various market factors.

Step-by-step explanation:

The theory of liquidity preference is not at odds with the basic ideas of supply and demand; rather, it's a specific application of these principles to the money market. In the theory of liquidity preference, demand refers to the demand for money, and supply refers to the amount of money that the central bank has made available. People's preference for liquidity, or their desire to hold cash, influences the interest rates, with higher liquidity preference leading to higher interest rates, all else being equal.

In the context of price floors, the correct answer is that a price floor will usually shift neither demand nor supply; instead, it creates a minimum price at which the product can be sold. It can lead to a surplus if the price floor is set substantially above the equilibrium price, because at that price, the quantity supplied will exceed the quantity demanded. If it's set slightly above the equilibrium price, it might not lead to a surplus if the demand is elastic.

In the goods market, the statement "no buyer would be willing to pay more than the equilibrium price" is false because there are various reasons a buyer might be willing to pay more, such as the presence of a more urgent need for the good, perceived value of the good being higher, or market dynamics like a temporary shortage. Similarly, the statement "In the goods market, no seller would be willing to sell for less than the equilibrium price" is also false as sellers might accept a lower price to clear excess inventory, or for competitive pricing strategies.