Question

According to liquidity preference theory,
a. an increase in the price level reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the interest rate shifts money demand rightward.
b. an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right.
c. an increase in the interest rate increases the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand leftward.
d. an increase in the price level increases the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the interest rate shifts money demand leftward.

Answer 1

According to liquidity preference theory an increase in the interest rate reduces the quantity of money demanded. This is shown as movement along the money demand curve. An increase in the price level shifts the money demand curve to the right.

Answer: Option (B)