The Federal Reserve econometric model estimates that the liquidity effect an increase in the money supply will
A) lower interest rates for 6 months to a year.
B) lower interest rates permanently.
C) have no effect on interest rates.
D) raise interest rates after 6 months to a year.

Question

Quizplus · Accepted Answer

The Federal Reserve econometric model estimates that an increase in the money supply will lower interest rates for 6 months to a year, which is known as the liquidity effect. This is because an increase in the money supply leads to an increase in the supply of loanable funds, driving down the cost of borrowing and decreasing interest rates in the short run. However, in the long run, other factors such as inflation expectations and changes in economic growth can lead to a reversal of this effect and potentially cause interest rates to rise.

The Federal Reserve Econometric Model Estimates That the Liquidity Effect