According to liquidity preference theory, the slope of the money demand curve is explained as follows:
a. interest rates rise as the Fed reduces the quantity of money demanded.
b. interest rates fall as the Fed reduces the supply of money.
c. people will want to hold less money as the cost of holding it falls.
d. people will want to hold more money as the cost of holding it falls.
I am not familiar with the theory, but only (d) seems to make sense.
The liquidity preference theory (hypothesis) comes from Keynes.
See, for example, http://www.answers.com/topic/liquidity-preference-theory
I too think d is the correct answer.
According to liquidity preference theory, the slope of the money demand curve is explained by option d: people will want to hold more money as the cost of holding it falls.
The liquidity preference theory, proposed by John Maynard Keynes, suggests that individuals and firms have a preference for holding money rather than other assets, such as bonds or stocks. The quantity of money demanded depends on the interest rate, which represents the opportunity cost of holding money.
As the cost of holding money decreases (i.e., interest rates fall), individuals and firms will find it more desirable to hold money rather than invest in other assets. Therefore, they will want to hold more money, leading to an upward-sloping money demand curve.
The correct answer is d. people will want to hold more money as the cost of holding it falls.
To understand why, let's break down the slope of the money demand curve according to the liquidity preference theory.
The liquidity preference theory suggests that people have a preference for holding money in liquid form rather than investing it. The quantity of money demanded (or desired) is influenced by two factors: the interest rate and the level of income in the economy.
When the cost of holding money (i.e., the interest rate) falls, people are incentivized to hold more money for transactions and precautionary purposes. In other words, as the interest rate decreases, the opportunity cost of holding money decreases. Consequently, people are more willing to hold larger amounts of money rather than investing it. This relationship between the cost of holding money and the quantity demanded creates a downward sloping money demand curve.
Therefore, the correct explanation is that people will want to hold more money as the cost of holding it falls (option d).