Question

The liquidity preference model: a uses the demand and supply of money to determine the level of potential output. b uses the demand and supply of money to determine the unemployment rate. c uses the demand and supply of money to determine the interest rate. d uses the demand and supply of money to determine nominal output. e uses the demand and supply of money to determine the price level.

Answer 1

Answer:

uses the demand and supply of money to determine the interest rate.

Explanation:

The liquidity preference theory was developed by John Maynard Keynes.

The theory postulates that investors should ask for a higher interest rate the longer the duration of the investment is. The higher interest rate is to compensate investors for lack of liquidity.

According to this theory, the interest rate on long term investments would be the highest, followed by medium term investments. Short term investments would have the lowest interest rates