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True, False, uncertain. (explanation required) a. situation: liquidity effect has less of an impact than different...

True, False, uncertain. (explanation required)

a. situation: liquidity effect has less of an impact than different effects, and there is an immediate adjustment to expected inflation. impact: interest rate will fall.

b. is the value of money fixed to the price level

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Answer #1

a) False. Liquidity effect has an immediate impact on the prices and interest rates. An increase in liquidity raises prices and lowers interest rates in the short run. However, there is no immediate adjustment to inflation since the factor prices are sticky and expectations take time to have their impact on real factors.

b) True. The value of money depends on the price level. At higher prices, the value of money ( the amount of goods and services that may be obtained from it) decreases, and vice versa.

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