If the monetary growth rate is far above the target range previously announced by the central bank, financial markets will assume that
A)the central bank will reduce money supply in the near future, which may push up interest rates
B)the rate of inflation will increase soon, which may lead to higher nominal interest rates
C)anticipation of higher inflation will increase the demand for credit from firms or households and this will push up interest rates
D)all of these are possible
E)none of these are possible

Question

Quizplus · Accepted Answer

In this scenario, all of the options are possible. If the central bank wants to bring the monetary growth rate back within the target range, they may reduce money supply which could lead to higher interest rates (option A). The increase in monetary growth rate could also lead to expectations of higher inflation, which could cause nominal interest rates to increase (option B). This expectation of higher inflation may also lead to an increase in demand for credit from firms and households, which could push up interest rates (option C). Therefore, all options are possible.

If the Monetary Growth Rate Is Far Above the Target