How does an increase in interest rates typically affect the demand for money, according to liquidity preference theory?

According to liquidity preference theory, when interest rates increase, the demand for money usually decreases. This happens because higher interest rates make it more attractive for people to save money in banks or invest it rather than hold onto it as cash. For example, if the interest rate rises from 2% to 5%, people might prefer to put their money in a savings account to earn that extra interest instead of keeping it in their wallets. As a result, fewer people will want to hold onto their money in cash, leading to a lower overall demand for money. In short, higher interest rates encourage saving and investing rather than spending or holding cash.