Monetarists contend that an expansionary monetary policy will lead to a rise in the interest rate because __________ and the __________ effect will raise interest rates by more than the initial __________ effect lowers it.

Question

Quizplus · Accepted Answer

Monetarists argue that an expansionary monetary policy initially lowers interest rates through the liquidity effect, but over time, inflationary expectations increase, leading to a rise in interest rates. The income effect, which also contributes to higher interest rates as the economy expands, combines with inflationary expectations to raise interest rates more than the initial liquidity effect lowers them.

Monetarists Contend That an Expansionary Monetary Policy Will Lead to a Rise