When the growth rate of the money supply is increased,interest rates will fall immediately if the liquidity effect is ________ than the other money supply effects and there is ________ adjustment of expected inflation.
A)larger;fast
B)larger;slow
C)smaller;slow
D)smaller;fast

Question

Quizplus · Accepted Answer

The liquidity effect suggests that an increase in the money supply will initially lower interest rates. If the liquidity effect is larger than other effects (such as the income and price expectations effects) and there is slow adjustment of expected inflation, interest rates will fall immediately. Fast adjustment of expected inflation would counteract the liquidity effect by increasing interest rates in anticipation of inflation.

When the Growth Rate of the Money Supply Is Increased,interest