An economic research paper demonstrates that when the money supply rises, the in

Question

An economic research paper demonstrates that when the money supply rises, the interest rate falls immediately, but then rises over longer periods. Another research paper verifies these results, but shows how the liquidity effect has diminished over time. Which of the following could explain this? A. Changes in the money supply no longer affect income. B. People adjust their inflation rate expectations sooner. C. Increases in the money supply cause the interest rate to fall more in the short term. D. Changes in the money supply no longer increase the price level.

Explanation / Answer

B. People adjust their inflation rate expectations sooner

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