Quiz Chapter 5 Quiz This Question 10 pts 3 of 10 9 complete

Quiz: Chapter 5 Quiz This Question: 10 pts 3 of 10 (9 complete) Assume that the liquidity effect is larger than the aggregate of the incoma, price levsl, and expectad inflation effects. Selact the graph which shows tha change in 2 interest rates when the growth rate of money supply incraases. OA. Graph A O B. If there is a decrease in the growth rate of the money supply, the resuting liquidity etlect is larger than the combined income, price-level, and expected inflation Graph Interest Rate Interest Rate effects, and inflationary expeclations adjust quickly, then the interest rate will A. immadiately rise and then fall over time, but will remain higher than its original leve O B. immediately fall and then rise over time, but will remain lower than its original level. C. rise gradually but continuously until it reaches its long-run level. D. fall gradualy but continuously until it reaches its long run level. Time Time a) b) Click to select your answer.

Solution

The correct answer is graph B, as money supply rises the interest rates will decline gradually.

The correct answer is A as the money supply falls.