Question 32

Positive correlation

Keynes' liquidity preference theory posits that there is a positive correlation between nominal income and nominal money demand. This means that as nominal income increases, the demand for money also increases.

A) Negative correlation

This option is incorrect as Keynes' theory specifically indicates that an increase in nominal income leads to an increase in money demand. A negative correlation would imply that higher income leads to lower money demand, which contradicts the core premise of the theory.

B) Positive correlation

This is the correct answer because Keynes' liquidity preference theory asserts that higher levels of nominal income result in a greater demand for money. This relationship is fundamental to understanding how individuals prefer liquidity as their income increases.

C) No correlation

This option is incorrect since it suggests that changes in nominal income have no effect on money demand. Keynes' theory clearly demonstrates that nominal income and money demand are interlinked, thereby invalidating the notion of no correlation.

D) Equal correlation

This choice is also incorrect as it implies that nominal income and money demand change in a one-to-one manner, which is not the essence of Keynes' theory. The theory emphasizes a positive correlation rather than a direct equality in their changes.

Conclusion

In summary, the positive correlation identified in Keynes' liquidity preference theory highlights the relationship between nominal income and money demand. While options A, C, and D misinterpret this relationship, option B accurately reflects the theory's assertion that an increase in nominal income results in an increase in money demand, making it the definitive correct choice.