A positive relationship exists between monetary growth and interest rates when the

Question

Quizplus · Accepted Answer

A positive relationship between monetary growth and interest rates occurs when the income effect, which can push interest rates up as economic activity and demand for loans increase, outweighs the liquidity effect, which initially lowers interest rates by adding more liquidity to the banking system. Choices A, B, and C describe conditions under which the relationship might not hold or be relevant, as they do not directly address the dynamics between monetary growth and interest rates through the mechanisms of liquidity and income effects.

A Positive Relationship Exists Between Monetary Growth and Interest Rates