The Theory of Liquidity Preference Implies That, Other Things Being

question 39

Multiple Choice

The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will:

• A) lower the interest rate.
• B) raise the interest rate.
• C) have no effect on the interest rate.
• D) first lower and then raise the interest rate.

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Definitions:

Induced Consumption

Consumer spending that increases as disposable income rises, and decreases as disposable income falls, unrelated to the level of interest rates.

Wealth Effect

The change in spending that accompanies a change in perceived wealth, typically when home values or investment portfolios increase.

Induced Consumption

Describes consumer spending that increases when income increases and decreases when income decreases, directly related to the level of disposable income.

Average Propensity

The proportion of total income or revenue that is spent on a certain category of expenditures or savings.