The Liquidity-Preference Theory Assumes That the Interest Rate Adjusts to Balance

question 43

Essay

The liquidity-preference theory assumes that the interest rate adjusts to balance the money demand and supply, where the money supply is arbitrarily determined by the central bank. However, we have previously learned that the central bank controls the money supply precisely by changing the interest rate. How do you reconcile the liquidity-preference theory with using the interest rate as a monetary policy tool?

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