The liquidity effect is the
A)direct relationship between money supply and the real interest rate.
B)proportional relationship between money supply and money demand.
C)direct relationship between nominal money supply and the real money supply.
D)inverse relationship between money supply and the nominal interest rate.

Question

Quizplus · Accepted Answer

The liquidity effect refers to the inverse relationship between the money supply (i.e. the amount of money in circulation) and the nominal interest rate. When the money supply increases, this leads to an increase in the amount of money available to lend, which in turn puts downward pressure on the interest rate that lenders can charge borrowers. Conversely, a decrease in the money supply puts upward pressure on interest rates.

The Liquidity Effect Is the