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The theory of liquidity preference suggests that the interest rate is determined by the supply and demand of real money balances.
Theory suggests that if interest rates rise, people with excess money supply try to convert their money into interest-bearing money by depositing or investing it and that reduces the interest rate. Similarly if the interest rate is low, people tend to convert interest-bearing money into non-interest-bearning money and when less funds are available to the money market, interest rate rises again.
In other words, if Real Money Balances (M/P) increases, interest rate should rise and if it decreases, interest rate should fall.
The demonstration of theory on the basis of actual data show that increase and decrease in money supply (Real Money Balances, M/P) does increase and decrease interest rate.

YearReal_Interest_RateReal_Money_Balance_MP
2004-0.456382.647277
20051.910922.352634
2006-6.774082.389855
20074.189272.397251
2008-0.236890.494145
2009-5.079300.852105
20102.879791.342442
2011-4.367500.641529
20127.125312.914435
20134.692971.911535
20144.020461.557529
20155.806902.963569
20168.1644524.939629
20174.047552.482507
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