According to the liquidity effect an increase in money supply growth relative to money demand in the short run leads to:
A) Higher interest rates
B) Lower interest rates
C) Higher inflation
D) Lower inflation
E) None of the above

Question

Quizplus · Accepted Answer

The liquidity effect suggests that an increase in the money supply, when demand remains constant, will lead to lower interest rates in the short run as there is more money available for borrowing.

According to the Liquidity Effect an Increase in Money Supply