Use the Following Figure to Nswer the Question

question 58

Multiple Choice

Use the following figure to nswer the question :

-The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure,one can conclude that the

• A)liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
• B)liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.
• C)liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.
• D)liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation.

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Definitions:

Certificates of Deposit

Certificates of Deposit (CDs) are financial products offered by banks that provide a fixed interest rate in exchange for keeping a deposit untouched for a predefined period.

Maturity Date

The specific date on which the principal amount of a bond, loan, or other financial instrument is to be paid back in full to the investor.

Tax Bracket

A range of income taxed at a specific rate by the government, part of a progressive tax system.

Corporate Bond

A debt security issued by a corporation and sold to investors, paying fixed interest over its lifetime and repaying the principal at the bond’s maturity date.