Which of the following statements is the most accurate? In general, under the monetary approach to the exchange rate,
A) while the short-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate.
B) while the long-run interest rate does depend on the absolute level of the money supply, continuing growth in the money supply do not affect the interest rate.
C) while the long-run interest rate does not depend on the absolute level of the money supply, continuing growth in the money supply eventually will affect the interest rate.
D) the long-run interest rate does not depend on the absolute level of the money supply, and thus continuing growth in the money supply will not affect the interest rate.
E) while the short-run interest rate does not depend on the absolute level of the money supply, continuing decline in the money supply eventually will not affect the interest rate.

Question

Quizplus · Accepted Answer

According to the monetary approach to the exchange rate, in the long run, the interest rate is not affected by the absolute level of the money supply. However, continuing growth in the money supply can eventually lead to inflation, which will increase the demand for higher interest rates to compensate for the loss in purchasing power. Therefore, the statement that the long-run interest rate does not depend on the absolute level of the money supply but continuing growth in the money supply eventually will affect the interest rate is the most accurate.

Which of the Following Statements Is the Most Accurate? in General