Question

M1 money growth in the U.S. was about $15\%$in localid="1647014587488" $2011\mathrm{and}2012$, and $10\%$in $2013$. Over the same time period, the yield on $3$-month Treasury bills was close to $0\%$. Given these high rates of money growth, why did interest rates stay so low, rather than increase? What does this say about the income, price-level, and expected-inflation effects

Short answer

The interest rate was low since the liquidity effect outweighed all other benefits.

Step-by-step solution

Introduction

Inflation is defined as a condition in which the price of all goods and services begins to rise, reducing people's real purchasing power.

Explanation

Money supply expansion is typically associated with high predicted inflation, strong economic growth, and a rise in interest rates over time. However, between 2011 and 2013, unemployment was high, economic growth was slow, and economists were more concerned about deflation. All other effects were smaller at the time in comparison to the liquidity effect. As a result, the interest rate remained low for a long time.

As a result, the interest rate was low since the liquidity effect outweighed all other benefits.