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Unformatted text preview: Bond Market Equilibrium Interest Rates Market for Money: LPF Equilibrium Interest Rates in LPF 3. Money supply → higher expected inﬂation in the future →
lowers expected real returns on bonds (Fisher eﬀect)→
higher interest rates 2. Money supply → higher prices→ higher prices shifts money
demand to the right (price level eﬀect)→ higher interest
rates 1. Money supply up → economic activity expands → higher
income shifts money demand to the right (income eﬀect) →
higher interest rates Liquidity preference framework says an increase in the money
supply lowers interest rates: the liquidity eﬀect.
However, there are second round eﬀects: Everything Else Remaining Equal? Asset Demand ...
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