When the public perceives that a monetary expansion will be temporary, what happens to nominal interest rates in the short run?
A) They will rise.
B) They will overshoot their target.
C) They will fall.
D) They will be unchanged.

Question

Quizplus · Accepted Answer

When the public perceives that a monetary expansion will be temporary, it means that they understand that the central bank will eventually reverse the policy and reduce the money supply. As a result, they may not alter their borrowing and lending behavior, leading to a limited impact on the economy. Therefore, in the short run, nominal interest rates are likely to fall or remain unchanged as the public's expectations about inflation and economic growth remain subdued.

When the Public Perceives That a Monetary Expansion Will Be