The Liquidity Preference Theory Holds That Interest Rates Are Determined

question 16

Multiple Choice

The liquidity preference theory holds that interest rates are determined by the:

• A) investor preference for short-term securties
• B) investor preference for higher-yielding long-term securities.
• C) “flow” of funds over time
• D) “flow” of bank credit over time

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Definitions:

Government Spending

The total expenditure by the government on goods and services, including public services, infrastructure, and welfare programs, to influence the economy.

Government Transfer Payments

Payments made by the government to individuals through programs such as Social Security and unemployment insurance, without any services being rendered in return.

Automatic Stabilizer

Economic policies and programs, such as unemployment insurance and taxation, that automatically adjust to counteract economic fluctuations without additional government intervention.

Natural Rate

Often refers to the natural rate of unemployment, indicating the lowest unemployment rate an economy can sustain over the long term without causing inflation.