In this question, we will compare the predicted impact of an increase in the money supply in the liquidity preference model versus the impact predicted by the quantity theory and the Fisher effect.

a. In the liquidity preference theory, what happens to (nominal) interest rates when money supply increases?(interest rates will increase, decrease or stay the same?)

b. Using the Quantity Equation (MV=PY or Growth rate in money=Inflation+Growth rate of Output) and the fisher effect (Nominal Interest Rate=Real Interest Rate+Expected Inflation), explain what happens to the nominal interest rate when money supply increases, assuming velocity is constant?(interest rates will increase, decrease or stay the same?)

c. If a. is a short run effect, and b. is a long run effect, how will interest behave over time when money supply rises?