An increase in the money supply will decrease interest rates in the short run but will not affect interest rates in the long run because an increase in the money supply will eventually _____ prices and _____ money demand.

Question

Quizplus · Accepted Answer

In the long run, an increase in the money supply will lead to higher prices (inflation) and, as a result, increase the demand for money as people need more money to conduct transactions at higher price levels. This is consistent with the classical dichotomy and the Fisher effect, which suggest that in the long run, nominal variables (like the money supply) affect other nominal variables (like the price level), but not real variables (like real interest rates, adjusted for inflation).

An Increase in the Money Supply Will Decrease Interest Rates