According to the theory of liquidity preference, which one describes excess demand condition:A.People want to hold more money than they have and will sell their financial assets. Consequently, supply in the market for loanable funds will increase, driving the interest rates up, and hence restoring equilibrium in the market for real money balances.B.People hold more money than they want and will use it to buy other financial assets. Consequently, supply in the market for loanable funds will rise, driving the interest rates down, and hence restoring equilibrium in the market for real money balances.C.People hold more money than they want and will use it to buy other financial assets. Consequently, supply in the market for loanable funds will decrease, driving the interest rates down, and hence restoring equilibrium in the market for real money balances.D.People want to hold more money than they have and will sell their financial assets. Consequently, supply in the market for loanable funds will fall, driving the interest rate up, and hence restoring equilibrium in the market for real money balances.

The correct answer is D. People want to hold more money than they have and will sell their financial assets. Consequently, supply in the market for loanable funds will fall, driving the interest rate up, and hence restoring equilibrium in the market for real money balances.

Here's the step by step explanation:

1. According to the theory of liquidity preference, people have a preference for liquidity i.e., they want to hold money.

2. In a situation of excess demand, people want to hold more money than they currently have.

3. To get more money, they will sell their financial assets. This means they are converting their assets into cash, increasing the demand for money.

4. As they sell their assets, the supply of loanable funds (money available for lending) in the market decreases because these funds are being converted into cash.

5. With less loanable funds available in the market, the interest rate (the cost of borrowing money) goes up. This is because when the supply of something decreases while the demand remains the same, the price increases.

6. As the interest rate goes up, it becomes more expensive to borrow money. This discourages people from borrowing and hence, reduces the demand for money.

7. This process continues until the demand for money equals the supply of money, restoring equilibrium in the market for real money balances.