In the liquidity-preference model, an increase in the money supply causes
A)the nominal interest rate to increase and the equilibrium quantity of money to decrease.
B)the nominal interest rate to increase and the equilibrium quantity of money to remain unchanged.
C)the nominal interest rate to decrease and the equilibrium quantity of money to remain unchanged.
D)the nominal interest rate to decrease and the equilibrium quantity of money to increase.

Question

Quizplus · Accepted Answer

According to the liquidity-preference model, an increase in the money supply leads to a decrease in the nominal interest rate as people will have more money than they want to hold in the form of liquid assets. This, in turn, leads to an increase in the equilibrium quantity of money as people will be willing to hold more money at a lower interest rate. Therefore, only option D is correct: an increase in the money supply causes the nominal interest rate to decrease, and the equilibrium quantity of money to increase.

In the Liquidity-Preference Model, an Increase in the Money Supply