Question

# Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increasesa. the inflation rate and nominal interest rates.b. the inflation rate, but not nominal interest rates.c. nominal interest rates, but not the inflation rate.d. neither the inflation rate nor nominal interest rates.

Answer

a. the inflation rate and nominal interest rates.

- Q: What is monetary neutrality? A: Monetary neutrality is the idea that changes in the money supply have no real effect on the economy.
- Q: What is the Fisher effect? A: The Fisher effect is the idea that changes in the nominal interest rate are proportional to changes in the expected inflation rate.
- Q: What happens if monetary neutrality and the Fisher effect both hold? A: If monetary neutrality and the Fisher effect both hold, then an increase in the money supply growth rate will increase the expected inflation rate by the same amount.
- Q: What happens to nominal interest rates in this situation? A: According to the Fisher effect, nominal interest rates will increase proportionally to the increase in the expected inflation rate.