Suppose that monetary neutrality and the Fisher effect both hold and the money supply growth rate has been the same for a long time.Other things the same a higher money supply growth would be associated with
A)both higher inflation and higher nominal interest rates.
B)a higher inflation rate,but not higher nominal interest rates.
C)a higher nominal interest rate,but not higher inflation.
D)neither a higher inflation rate nor a higher nominal interest rate.

Question

Quizplus · Accepted Answer

Monetary neutrality implies that changes in the money supply only affect nominal variables, not real ones. The Fisher effect states that the nominal interest rate adjusts one-for-one with changes in the inflation rate. Therefore, a higher money supply growth rate would lead to higher inflation and, consequently, higher nominal interest rates.

Suppose That Monetary Neutrality and the Fisher Effect Both Hold