Keynes's liquidity preference theory indicates that the demand for money is ________ related to ________.

Question

BlackTom AI · Accepted Answer

The question presents Keynes's liquidity preference theory and asks how the demand for money is related to a key variable.

First, recall the core idea: in liquidity preference theory, people hold money because it provides liquidity and serves three motives (transactions, precautionary, and speculative). The speculative motive is especially tied to interest rates, since higher interest rates increase the opportunity cost of holding money (which earns no interest) and thus reduce the quantity of money demanded for speculative purposes.

Next, analyze the relationship described: if interest rates rise, the opportunity cost of holding money rises, so individuals are more likely to convert money into interest-bearing assets. Conversely, if interest rates fall, the incentive to hold money increases because the forgone interest is smaller, raising the quantity of money demanded for liquidity purposes.

Since the question asserts a relationship between the demand for money and interest rates, the standard Keynesian interpretation is that the demand for money is negatively related to interest rates: as interest rates go up, money demand goes down; as interest rates go down, money demand goes up.

Given that the provided answer indicates a negative relationship with interest rates, the reasoning aligns with the classical interpretation of the liquidity preference framework.

Note on the data: the "answer_options" field is empty, so there is no explicit list of alternatives to evaluate for correctness. In a typical multiple-choice setup, one would compare each option to the fundamental relationship described above, identifying why alternatives proposing positive relationships or no relationship would be incorrect.

In summary, the key conceptual takeaway is that, under Keynes's liquidity preference theory, the demand for money is inversely related to interest rates due to the opportunity cost of holding non-interest-bearing money versus investing in interest-bearing assets. This explains why higher rates suppress money demand and lower rates encourage it.

Keynes's liquidity preference theory indicates that the demand for money is related to .

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