Use the following figure to nswer the question :
-In the figure above,illustrates the effect of an increased rate of money supply growth at time period 0. From the figure,one can conclude that the
A)Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation.
B)liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation.
C)liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation.
D)Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.

Question

Use the following figure to nswer the question : 
-In the figure above,illustrates the effect of an increased rate of money supply growth at time period 0. From the figure,one can conclude that the
A)Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation. 
B)liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation. 
C)liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation. 
D)Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.

Quizplus · Accepted Answer

The liquidity effect is dominated by the Fisher effect, meaning that the increase in money supply leads to higher expected inflation, which causes interest rates to rise quickly.

Use the Following Figure to Nswer the Question