Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases
A)the inflation rate and the nominal interest rate by the same number of percentage points.
B)nominal interest rates but by less than the percentage point increase in the inflation rate.
C)the inflation rate but not the nominal interest.
D)neither the inflation rate nor the nominal interest rate.

Question

Quizplus · Accepted Answer

Monetary neutrality implies that changes in the money supply do not affect real variables in the long run, but they can affect nominal variables like the inflation rate. The Fisher effect states that the nominal interest rate adjusts one-for-one with the inflation rate to maintain the real interest rate. Therefore, an increase in the money supply growth rate would increase both the inflation rate and the nominal interest rate by the same number of percentage points.

Suppose That Monetary Neutrality and the Fisher Effect Both Hold