The Theory of Liquidity Preference Implies That

question 99

Multiple Choice

The theory of liquidity preference implies that:

• A) as the interest rate rises, the demand for real balances will fall.
• B) as the interest rate rises, the demand for real balances will rise.
• C) the interest rate will have no effect on the demand for real balances.
• D) as the interest rate rises, income will rise.

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Definitions:

Unemployment

The situation in which individuals who are capable of working and are seeking employment are unable to find work.

Expected Inflation

The rate at which prices of goods and services are anticipated to rise over time, as forecasted by consumers, businesses, and economists.

Actual Inflation

The rate at which the general level of prices for goods and services is rising, and subsequently, eroding purchasing power.

Unemployment Rate

The unemployment rate is the percentage of the labor force that is jobless and actively seeking employment.