Explain how a sustained increase in the growth rate of the money supply (gM↑) at a particular time (t*) can lead first to the liquidity effect, then to the nominal income effect, and finally to the inflation expectations effect. Also, explain how the interest rate changes in response to each of these effects.
Explain how a sustained increase in the growth rate of the money supply (gM↑) at a particular time (t*) can lead first to the liquidity effect, then to the nominal income effect, and finally to the inflation expectations effect. Also, explain how the interest rate changes in response to each of these effects.
Chapter7: Inflation
Section: Chapter Questions
Problem 14SQ
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Explain how a sustained increase in the growth rate of the money supply (gM↑) at a particular time (t*) can lead first to the liquidity effect, then to the nominal income effect, and finally to the inflation expectations effect. Also, explain how the interest rate changes in response to each of these effects.
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