Question

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.

Answer 1

I am not familiar with the theory, but only (d) seems to make sense.

Answer 2

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.