1) If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is immediate, then the
A) interest rate will fall.
B) interest rate will rise.
C) interest rate will fall immediately below the initial level when the money supply grows.
D) interest rate will rise immediately above the initial level when the money supply grows.
2) In the figure above, illustrates the effect of an increased rate of money supply growth at time period 0. From the figure, one can conclude that the
A) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
B) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
C) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
D) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.