Question

According to the liquidity preference model, increasing money supply will lead to a lower nominal interest...

According to the liquidity preference model, increasing money supply will lead to a lower nominal interest rate. But according to the quantity theory (Fisher effect), it will lead to a higher nominal interest rate. Can you explain?

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Answer) According to liquidity preference, increase in money supply leads to excess supply of money which people use to purchase bonds which increases the demand for bonds, prices rises and due to inverse relation between price and interest rate, interest rate declines.

According to Quantity theory,MV =PY , increase in money supply leads to increase in price level and hence inflation. Fischer effect = real rate of interest = nominal interest rate - inflation so to keep the real interest rate, nominal interest rate should be increased.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
According to the liquidity preference model, increasing money supply will lead to a lower nominal interest...
According to the liquidity preference model, increasing money supply will lead to a lower nominal interest rate. But according to the quantity theory (Fisher effect), it will lead to a higher nominal interest rate. Can you explain?
According to the theory of liquidity preference, RBA can decrease the ................ of money and .......................
According to the theory of liquidity preference, RBA can decrease the ................ of money and .................... the interest rate Group of answer choices A. supply, lower B. demand, lower C. demand, raise D. supply, raise
Liquidity preference theory If expected inflation falls, then, according to the liquidity preference theory and the...
Liquidity preference theory If expected inflation falls, then, according to the liquidity preference theory and the Fisher equation, demand for real money balances will A rise. B fall. C remain unchanged.
Using the liquidity preference model, graphically illistrate the effect of an increase in the money supply...
Using the liquidity preference model, graphically illistrate the effect of an increase in the money supply (ceteris paribus)
20. In the liquidity preference (money supply/money demand) model, we assume A. as nominal interest rates...
20. In the liquidity preference (money supply/money demand) model, we assume A. as nominal interest rates rise, households hold less wealth as money. B. as real income rises, households hold less wealth as money. C. as price level rises, households hold less wealth as money. D. as expected inflation increases, households hold less wealth as money. 21.When interest rates rise, the value of bank’s fixed-income assets and the revenue from future loans . A. rises/rises B. rises/falls C. falls/falls D....
When Money supply decreases permanently, we know that price level also decreases by the Quantity Theory...
When Money supply decreases permanently, we know that price level also decreases by the Quantity Theory of Money and According to fisher effect and Liquidity preference theory framework, which is MS=L * ( i , Y), we know that nominal interest rate goes up, which leads to an increase in money demand. My question is, by how much does the price level decreases and Money demand increases when MS falls? Do we have one for one relationship among them or...
8. According to the Classical Dichotomy, a country with a hyper-inflation due to excessive money supply...
8. According to the Classical Dichotomy, a country with a hyper-inflation due to excessive money supply growth should have: nominal wage falling real wage falling real wage rising nominal wage rising 9. According to the Quantity Theory of Money and the Fisher equation, a rise in money supply (for a given level of GDP and velocity) should raise the: nominal interest rate and real interest rate inflation rate, nominal interest rate, and real interest rate inflation rate and nominal interest...
Suppose the market for money holding (meaning, the liquidity preference model) is in equilibrium at an...
Suppose the market for money holding (meaning, the liquidity preference model) is in equilibrium at an interest rate of 8%. The reserve ratio is 5%. (a) Depict this situation graphically. (b) Suppose the Federal Reserve carries out an open market purchase of 120 million U.S. Treasury bonds. Depict the effect this will have in the market for money holding, showing carefully the size of any shifts. (c) Suppose instead, now, that interest rates were already at zero before the operation...
According to the theory of liquidity preference, if the interest rate rises a. people want to...
According to the theory of liquidity preference, if the interest rate rises a. people want to hold less money. This response is shown by moving to the left along the money demand curve. b. people want to hold more money. This response is shown by moving to the right along the money demand curve. c. people want to hold less money. This response is shown by shifting the money demand curve left. d. people want to hold more money. This...
Does increasing money supply necessarily lead to higher inflation? Explain the theory and consider your arguments...
Does increasing money supply necessarily lead to higher inflation? Explain the theory and consider your arguments in light of the response of central banks to the Great Recession of 2007-2008.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT