According to the quantity theory and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase:
A) 2 percent.
B) 3 percent.
C) 5 percent.
D) 6 percent.

Question

Quizplus · Accepted Answer

According to the Fisher equation, the nominal interest rate equals the real interest rate plus the expected inflation rate. Therefore, if the real interest rate is 2 percent and the money growth increases by 3 percent, the expected inflation rate must be 1 percent (3% - 2% = 1%). This means the nominal interest rate will increase by the sum of the real interest rate and the expected inflation rate, which is 5 percent (2% + 1% = 3%). Thus, the correct answer is C, 5 percent.

According to the Quantity Theory and the Fisher Equation, If