Question

"Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases" a. the inflation rate and growth of real GDP. b. the inflation rate but not the growth rate of real GDP. c. the growth rate of real GDP, but not the inflation rate. d. neither the inflation rate nor the growth rate of real GDP.

Answer 1

Option (b) is correct.

Step-by-step explanation:

The money supply holds two conditions:

(i) Monetary neutrality

(ii) Fisher effect

Under monetary neutrality, any change in the money supply of an economy doesn't affect the real variables but it affects the nominal variables.

So, if there is an increase in the money supply in an economy then as a result the inflation rate and the nominal GDP increases but the growth rate of real GDP remains the same because of the condition of. monetary neutrality.