Suppose that monetary neutrality and the Fisher effect both hold.An increase in the money supply growth rate increases
A)the inflation rate and nominal interest rates.
B)the inflation rate,but not nominal interest rates.
C)nominal interest rates,but not the inflation rate.
D)neither the inflation rate nor nominal interest rates.

Question

Quizplus · Accepted Answer

If monetary neutrality and the Fisher effect both hold, an increase in the money supply growth rate will only affect nominal variables, such as the inflation rate and nominal interest rates. Real variables, such as real GDP or real interest rates, will remain unchanged. This is consistent with choice A, which states that an increase in the money supply growth rate will increase both the inflation rate and nominal interest rates.

Suppose That Monetary Neutrality and the Fisher Effect Both Hold