Using Keynes' liquidity preference theory, explain why aggregate demand for money function is downward sloping? What will happen to the position of aggregate money demand and the LM-curve if expected inflation increase?
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The liquidity preference function is downward sloping (i.e. the willingness to hold cash increases as the interest rate decreases). ... As the interest rate rises, the opportunity cost of holding money rather than investing in securities increases. So, as interest rates rise, speculative demand for money falls.
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