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Liquidity preference theory If expected inflation falls, then, according to the liquidity preference theory and the...

Liquidity preference theory

If expected inflation falls, then, according to the liquidity preference theory and the Fisher equation, demand for real money balances will

A rise.

B fall.

C remain unchanged.

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Answer #1

THe answer is B-) Falls

because , THe Fisher equation says that, when the expected inflation rate falls, the real interest rate increase and accordin to the liquidity preference theory, the interest rate and demand for real money balance are inverselt related to each other, thus when the interest rate are high, the demand for real money balance will fall. because when the interest rate are high, people will likely to have more bonds in the hand than a cash and thus demand for real money decline.

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