Suppose that the nominal interest rate and expected inflation both increase by 2%.Given this information,we would expect which of the following to occur?
A)a reduction in the real interest rate
B)an increase in the real interest rate
C)an increase in investment
D)a reduction in money demand
E)both A and C

Question

Quizplus · Accepted Answer

When both the nominal interest rate and expected inflation increase by the same amount, the real interest rate remains unchanged. However, higher nominal interest rates can lead to a reduction in money demand as people prefer to hold less cash and more interest-bearing assets.

Suppose That the Nominal Interest Rate and Expected Inflation Both