-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

Quizplus · Accepted Answer

The liquidity effect initially lowers interest rates, but as expected inflation rises, interest rates increase slowly, indicating a larger liquidity effect and slow adjustment to inflation expectations.

-The Figure Above Illustrates the Effect of an Increased Rate