Which theory suggests that people will alter their investment strategies based on changing interest rates?

The Liquidity Preference theory posits that investors will adjust their investment strategies in response to changes in interest rates due to their preference for liquidity. According to this theory, individuals and institutions prefer to hold their wealth in liquid assets (such as cash or savings) when interest rates are low, as the opportunity cost of holding liquid assets decreases. Conversely, when interest rates rise, the cost of holding liquid assets increases due to the missed opportunities for earning higher returns on other investments. This incentivizes people to seek investments that yield better returns, thus shifting their investment strategies in relation to interest rate fluctuations.

The other concepts are less directly related to the immediate alteration of investment strategies based on interest rates. The Time Value of Money focuses on the idea that money available today is worth more than the same amount in the future due to its potential earning capacity, not specifically on how interest rates influence investment choices. Monetary Policy refers to the actions of a central bank to control the money supply and interest rates, impacting the broader economy rather than individual investment strategies directly. Fiscal Policy involves government spending and taxation decisions and, again, is more about overall economic policy rather than the personal investment decisions linked directly to interest rate changes.