how does the theory of the liquidity preference explain downward-slopping aggregate demand curve? Explain your answer...

how does the theory of the liquidity preference explain downward-slopping aggregate demand curve? Explain your answer in both words and diagrams.

Expert Solution

Liquidity preference theory is a concept under which an investor always demand a higher rate of interest or higher rate of premium on securities with time period of long term maturities and definitely it carries a greater risk because in the investment the future is uncertain.

In this theory the interest rate automatically adjust the balance of demand and supply of money.

The concept of liquidity preference theory is given by professor Keynes where people generally keep the money if the rate of interest in the market is low.

There is an inverse relationship between the demand of money and the rate of interest because people prefer to keep cash if the rate of return on investment is low and vice versa.

It can be explain with the help of the diagram where aggregate demand increases as the rate of interest decreases and aggregate demand decreases when the rate of interest increases.

Rahul Sunny answered 2 years ago

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Q 1 - Can you explain why the aggregate demand curve is downward sloping using the money market?

can you explain why the aggregate demand curve is downward sloping using the money market ?

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