In the liquidity preference framework,a one-time increase in the money supply results in a price level effect. The maximum impact of the price level effect on interest rates occurs
A)at the moment the price level hits its peak (stops rising)because both the price level and expected inflation effects are at work.
B)immediately after the price level begins to rise,because both the price level and expected inflation effects are at work.
C)at the moment the expected inflation rate hits its peak.
D)at the moment the inflation rate hits it peak.

Question

Quizplus · Accepted Answer

The maximum impact on interest rates in the liquidity preference framework occurs at the moment the price level hits its peak because at this point, both the direct effect of the price level on interest rates and the expectations of future inflation are influencing interest rates. The direct effect comes from the increased money supply leading to higher prices, and the expectation effect comes from people anticipating further inflation, both of which work together to influence interest rates most strongly at this point.

In the Liquidity Preference Framework,a One-Time Increase in the Money