Asked by Alexis Lowrance on Apr 24, 2024
Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases
A) the inflation rate and the nominal interest rate by the same number of percentage points.
B) nominal interest rates but by less than the percentage point increase in the inflation rate.
C) the inflation rate but not the nominal interest.
D) neither the inflation rate nor the nominal interest rate.
Nominal Interest Rate
The rate of interest on a loan or investment without adjusting for inflation.
Monetary Neutrality
The economic theory that changes in the money supply only affect nominal variables and have no effect on real variables such as output or unemployment in the long run.
Fisher Effect
An economic theory proposing that the real interest rate is independent of monetary measures, specifically that the nominal interest rate adjusts to expected inflation.
- Illustrate the effect of inflation on interest rates via the Fisher effect exploration.
- Describe the relationship between inflation, money growth rate, and nominal and real variables in the long run.
Learning Objectives
- Illustrate the effect of inflation on interest rates via the Fisher effect exploration.
- Describe the relationship between inflation, money growth rate, and nominal and real variables in the long run.