Final answer:
The Fed's increase in money growth eventually leads to higher inflation and nominal interest rates due to an oversupply of money which devalues currency and prompts lenders to increase rates to compensate for the loss in purchasing power.
Step-by-step explanation:
When the Federal Reserve (the Fed) increases the rate of money growth, the long-term result is both a higher inflation rate and a higher nominal interest rate. In the short term, the increased money supply leads to lower interest rates, which encourages borrowing and spending by banks, businesses, and consumers, stimulating the economy.
However, as the money supply continues to grow, prices begin to rise due to the higher amount of money chasing the same quantity of goods and services, leading to inflation. Subsequently, higher inflation expectations lead to an increase in nominal interest rates as lenders demand more compensation for the decreased purchasing power of future payments. Furthermore, this process could also result in investors taking on excessive risks as money is cheaper to borrow.