Question

Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate rises, then a. neither the nominal nor the real interest rate rise. b. the nominal interest rate rises, but the real interest rate does not. c. the real interest rate rises, but the nominal interest rate does not. d. both the nominal and the real interest rate rise.

Answer 1

a. neither the nominal nor the real interest rate rise.

Step-by-step explanation:

Under Fisher's theory, if the nominal interest rate increases at a higher rate than the inflation rate, then the real interest rate rises. If the inflation rate increases more than the nominal interest rate, then the real interest rate decreases.

Generally, an increase in the money supply decreases the nominal interest rate and increases the inflation rate. That results in both lower nominal interest rates and lower real interest rates.