Figure 4.4
-Figure 4.4 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 4.4
-Figure 4.4 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 refers to the initial decrease in interest rates due to an increased money supply, while the expected inflation effect refers to the subsequent increase in interest rates as inflation expectations adjust. If the liquidity effect is larger, it means interest rates initially fall more significantly before adjusting slowly to the expected inflation effect.

Figure 4.4 -Figure 4.4 Illustrates the Effect of an Increased Rate of Rate