-The figure above illustrates the effect of an increased rate of money supply growth at time period T₀. From the figure, one can conclude that the ________.
A)liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation
B)liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation
C)liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation
D)liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation

Question

-The figure above illustrates the effect of an increased rate of money supply growth at time period T₀. From the figure, one can conclude that the ________.
A)liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation 
B)liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation 
C)liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation 
D)liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation

Quizplus · Accepted Answer

The liquidity effect initially lowers interest rates due to increased money supply, but if interest rates adjust slowly to expected inflation, the liquidity effect is larger than the expected inflation effect in the short term.

-The Figure Above Illustrates the Effect of an Increased Rate