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

Question

Quizplus · Accepted Answer

If monetary neutrality and the Fisher effect both hold, then an increase in the money supply growth rate would increase the nominal interest rate by the same amount as the increase in the money supply growth rate. However, the real interest rate (which is the nominal interest rate minus the inflation rate) would remain unchanged by the increase in the money supply growth rate. Therefore, the inflation rate would increase, but real interest rates would not be affected.

Suppose That Monetary Neutrality and the Fisher Effect Both Hold