Asked by Nguyên Tr?ng on Apr 29, 2024
Verified
Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate rises, then
A) both the nominal and the real interest rate rise.
B) neither the nominal nor the real interest rate rise.
C) the nominal interest rate rises, but the real interest rate does not.
D) the real interest rate rises, but the nominal interest rate does not.
Fisher Effect
describes the relationship between nominal interest rates, real interest rates, and inflation, stating that the nominal interest rate is equal to the sum of the real interest rate and the expected inflation rate.
Monetary Neutrality
The concept that changes in the money supply only affect nominal variables and have no long-term impact on real variables like output or employment.
Nominal Interest Rate
The interest rate before adjustments for inflation, representing the rate stated on a loan or investment.
- Explain the influence of inflation on interest rates by analyzing the Fisher effect.
- Explain the connection between long-term inflation, the rate of money expansion, and both nominal and real factors.
Verified Answer
PL
Pamela LewisMay 03, 2024
Final Answer :
C
Explanation :
The Fisher effect posits that the nominal interest rate adjusts to the expected inflation rate so that the real interest rate remains unchanged. Monetary neutrality suggests changes in the money supply affect nominal variables (like the nominal interest rate) but not real variables (like the real interest rate). Therefore, if the money supply growth rate rises, it leads to higher expected inflation, which in turn causes the nominal interest rate to rise, but the real interest rate remains unchanged.
Learning Objectives
- Explain the influence of inflation on interest rates by analyzing the Fisher effect.
- Explain the connection between long-term inflation, the rate of money expansion, and both nominal and real factors.