Incorporating the Liquidity Preference Function into the Simple Model Changes

question 157

Multiple Choice

Incorporating the liquidity preference function into the simple model changes its outcome somewhat. What is the impact?

• A) Changes in the growth of the money supply cause inflation and nominal interest rates to change, which affects demand for real balances and causes further discontinuous influences on prices.
• B) Changes in the inflation rate no longer affect nominal interest rates: the Fisher effect is no longer operative.
• C) Changes in nominal interest rates have an immediate effect on the real exchange rate, bypassing the adjustment process.
• D) Changes in the money growth rate increase real balances, since prices are no longer flexible.

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Definitions:

Investment Decisions

Choices made by individuals or entities regarding where to allocate resources with the expectation of generating a positive return in the future.

Interest Rate

The percentage of a sum of money charged for its use, typically expressed as an annual percentage.

Total Investment

The total amount of money invested in assets, projects, or securities by individuals, companies, or governments.

Expected Rate

The Expected Rate often refers to the anticipated return or yield on an investment, savings, or any financial product over a specified period.