Discussion
Liquidity preference curve is downward sloping from left to right, because .................... .
Answer: C
It slopes downward because as the rate of interest rises, the opportunity cost of holding money rises.
Money held as cash earns no interest, so the interest rate is the opportunity cost of holding it instead of bonds. When the interest rate rises, holding idle money becomes more expensive and people demand less money, especially for speculative purposes; when it falls, they hold more. This inverse relationship gives the liquidity preference curve its downward slope.
The slope is about the demand for money, not the central bank's supply of it. The opportunity cost does change with the interest rate, and it rises rather than falls as the rate rises.
Post your comment
Please log in or register to post a comment.
Examination Categories
- SSC Exams
- Banking Exams
- Teaching Exams
- Civil Services Exams
- Railways Exams
- Engineering Recruitment Exams
- Defence Exams
- State Government Exams
- Police Exams
- Insurance Exams
- Nursing Exams
- Other Government Exams
- NRA CET
- PG Entrance Exams
- Campus Placement
- MBA Entrance Exams
- CUET and UG Entrance
- Judiciary Exams
- Regulatory Body Exams
- Software Development