When money is neutral, an increase in the rate of inflation from 2 per cent to 5 per cent will _____.
A)increase the nominal interest rate by 3percentage points
B)increase the real interest rate by 3 percentage points
C)decrease the nominal interest rate by 3 percentage points
D)increase the nominal interest rate by less than 3 percentage points

Question

Quizplus · Accepted Answer

When money is neutral, an increase in the rate of inflation implies that the nominal interest rate will adjust to reflect the higher inflation, increasing by the same amount as the inflation increase, which in this case is 3 percentage points.

When Money Is Neutral, an Increase in the Rate of Inflation