Figure 4.5

-Figure 4.5 illustrates the effect of an increased rate of money supply growth.From the figure,one can conclude that the liquidity effect is ________ than the expected inflation effect and interest rates adjust ________ to changes in expected inflation.
A) smaller; quickly
B) larger; quickly
C) larger; slowly
D) smaller; slowly

Question

Figure 4.5
 
-Figure 4.5 illustrates the effect of an increased rate of money supply growth.From the figure,one can conclude that the liquidity effect is ________ than the expected inflation effect and interest rates adjust ________ to changes in expected inflation.
A) smaller; quickly 
B) larger; quickly 
C) larger; slowly 
D) smaller; slowly

Quizplus · Accepted Answer

The liquidity effect, which initially lowers interest rates due to increased money supply, is larger than the expected inflation effect, which raises interest rates. However, interest rates adjust slowly to changes in expected inflation.

Figure 4.5 -Figure 4.5 Illustrates the Effect of an Increased Rate of an Increased