In the context of monetary economics, the 'Liquidity Effect' of an increase in the money supply refers to:
A. The short-run decline in nominal interest rates caused by an increase in liquidity
B. The long-run rise in interest rates
C. Only the rise in prices
D. Only the rise in output
Answer: Option A
Solution (By JKSSB Mock Tests)
The liquidity effect is the tendency for an exogenous increase in the money supply to lower nominal interest rates in the short run as the supply of loanable funds increases.
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