Question

According to the theory of liquidity preference, if the interest rate rises

	a.	people want to hold less money. This response is shown by moving to the left along the money demand curve.
	b.	people want to hold more money. This response is shown by moving to the right along the money demand curve.
	c.	people want to hold less money. This response is shown by shifting the money demand curve left.
	d.	people want to hold more money. This response is shown by shifting the money demand curve right

Answer 1

Answer: a. people want to hold less money. This response is shown by moving to the left along the money demand curve.

Money demand curve shows the inverse (negative) relationship between the interest rate and the quantity of money demanded (quantity of money people want to hold). When the interest rate rises, the opportunity cost of holding money increases, so the quantity of money demanded falls.This makes a leftward movement along the demand curve showing that as the interest rate increases, people will hold less money and vice versa.