C.5 The Behaviour of Interest Rates

Question 1

Income effect

Answer 1

An increase in the money supply is a rise in the interest rates in response to the higher level of income

Question 2

Price-level effect

Answer 2

An increase in the money supply is a rise in interest rates in response to the rise in price level

Question 3

Expected-inflation effect

Answer 3

An increase in the money supply is a rise in interest rates in response to the rise in the expected inflation rate

Question 4

The expected-inflation effect will persist only…

Answer 4

as long as the price level continues to rise