Question

According to the liquidity preference model, if the Federal Reserve increases the money supply, the equilibrium interest rate ________, and this leads to _________ in the quantity demanded of nonmonetary interest-bearing financial assets.
a) falls; an increase.b) falls; a decrease.c) rises; an increase.d) rises; a decrease.

Answer 1

Answer:

b) falls; a decrease

Explanation:

According to the liquidity preference model, if the Federal Reserve increases the money supply, the equilibrium interest rate falls and this leads to a decrease in the quantity demanded of non-monetary interest-bearing financial assets.

Liquidity preference model which is also the Keynesian theory of money demand, says that people need money for three major objective transaction motive, precautionary motive, and speculative motive.  The increase in money supply decreases interest rate and increases the quantity of money demanded and the decreases the quantity demanded of non-monetary interest-bearing financial assets.