Question

The long-run Fisher effect links rises in inflation with rises in nominal interest rates by the same proportion, resulting in ____ the demand for money. Group of answer choices an increase in an increase in the supply of money offsetting the increase in no effect on a decrease in

Answer 1

an increase

Step-by-step explanation:

As according International Fisher effect theory, we have:

Real interest rate = Nominal Interest rate - Inflation rate

As nominal interest rates and inflation rate increase by the same proportion t (t>0) (Nominal Interest rate - Inflation rate) x t = Real interest rate x t

=> Real interest rate would rise

When the domestic real interest rate increases:

+) The demand of domestic market for foreign assets decreases

=> The supply for domestic currency decreases (1)

+) The demand of foreign market for domestic assets increases

=> The demand for domestic currency increases (2)

Opposite result for foreign currency.