CA Foundation · Business Economics · Money Market
According to the liquidity preference approach, which pair of factors mainly determines the equilibrium rate of interest in the money market?
The equilibrium interest rate is determined by the demand for money (liquidity preference) and the supply of money. The rate adjusts until the amount the public wishes to hold equals the amount the central bank has made available.
- ADemand for money and supply of moneyCorrect
- BSavings and investment in the commodity market
- CExports and imports
- DGovernment revenue and expenditure
Explanation
Under liquidity preference theory, the interest rate is the price of holding money and is set where demand for money (liquidity preference) equals the supply of money. Savings-investment is the classical loanable funds view, so option 2 is wrong.
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