In the classical model, according to the quantity theory of money and the Fisher equation, an increase in money growth increases:

Question

Quizplus · Accepted Answer

According to the quantity theory of money, an increase in money growth leads to higher inflation. The Fisher equation states that the nominal interest rate is the sum of the real interest rate and expected inflation. Therefore, an increase in money growth increases expected inflation, which in turn increases the nominal interest rate.

In the Classical Model, According to the Quantity Theory of Money