1) The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the
A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to change in expected inflation.
B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation.
C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation.
D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
2) Interest rates increased continuously during the 1970s. The most likely explanation is
A) banking failures that reduced the money supply.
B) a rise in the level of income.
C) the repeated bouts of recession and expansion.
D) increasing expected rates of inflation.
3) Using the liquidity preference framework, what will happen to interest rates if the Fed increases the money supply?
4) Using the liquidity preference framework, show what happens to interest rates during a business cycle recession.