Suppose that velocity and output are constant, the quantity theory and Fisher effect are correct, the nominal interest rate is 7 percent, and money growth is 2 percent. Which of the following is consistent with these facts?
A)The real interest rate is 2 percent, and nominal wages are rising.
B)The real interest rate is 2 percent, and real wages are rising.
C)The real interest rate is 5 percent, and nominal wages are rising.
D)The real interest rate is 9 percent, and real wages are rising.

Question

Quizplus · Accepted Answer

The Fisher effect states that the nominal interest rate is the sum of the real interest rate and the inflation rate. With a nominal interest rate of 7% and money growth (inflation) of 2%, the real interest rate is 5%.

Suppose That Velocity and Output Are Constant, the Quantity Theory