Because the liquidity-preference framework focuses on the:

a. short run, it assumes the price level adjusts to bring the money market to equilibrium.

b. short run, it assumes the interest rate adjusts to bring the money market to equilibrium.

c. long run, it assumes the price level adjusts to bring the money market to equilibrium.

d. long run, it assumes the interest rate adjusts to bring the money market to equilibrium.

Question

Business

Prego

31 March, 17:42

Because the liquidity-preference framework focuses on the:

a. short run, it assumes the price level adjusts to bring the money market to equilibrium.

b. short run, it assumes the interest rate adjusts to bring the money market to equilibrium.

c. long run, it assumes the price level adjusts to bring the money market to equilibrium.

d. long run, it assumes the interest rate adjusts to bring the money market to equilibrium.

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Answers (1)

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Noodles · Answer 1

B. Short run, it assumes the interest rate adjusts to bring the money market to equilibrium

Explanation:

This theory is explained to be a model that suggests that an investor should demand a higher interest rate or premium on securities with long-term maturities that carry greater risk because, all other factors being equal, investors prefer cash or other highly liquid holdings.

According to this theory, which was developed by John Maynard Keynes in support of his idea that the demand for liquidity holds speculative power, investments that are more liquid are easier to cash in for full value. Cash is commonly accepted as the most liquid asset. According to the liquidity preference theory, interest rates on short-term securities are lower because investors are not sacrificing liquidity for greater time frames than medium or longer-term securities.