Use the following figure to nswer the question :

-The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure,one can conclude that the
A)Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation.
B)liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation.
C)liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation.
D)Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.

Question

Use the following figure to nswer the question :

-The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure,one can conclude that the
A)Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation. 
B)liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation. 
C)liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation. 
D)Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.

Quizplus · Accepted Answer

The liquidity effect, which suggests that an increase in the money supply will initially lower interest rates, appears to dominate initially after T0, as indicated by the initial decrease in interest rates. This is followed by a slower adjustment of interest rates to changes in expected inflation, consistent with the description in choice A.

Use the Following Figure to Nswer the Question