Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate rises, then
A)both the nominal and the real interest rate rise.
B)neither the nominal nor the real interest rate rise.
C)the nominal interest rate rises, but the real interest rate does not.
D)the real interest rate rises, but the nominal interest rate does not.

Question

Quizplus · Accepted Answer

The Fisher effect posits that the nominal interest rate adjusts to the expected inflation rate so that the real interest rate remains unchanged. Monetary neutrality suggests changes in the money supply affect nominal variables (like the nominal interest rate) but not real variables (like the real interest rate). Therefore, if the money supply growth rate rises, it leads to higher expected inflation, which in turn causes the nominal interest rate to rise, but the real interest rate remains unchanged.

Under the Assumptions of the Fisher Effect and Monetary Neutrality