Suppose the money supply is set to grow at 7%,real GDP grows at 5%,and the expected real interest rate on Aaa corporate bonds averages 6%.Using the quantity theory of money and the Fisher equation,the nominal interest rate on the Aaa corporate bond should be

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the nominal interest rate is equal to the real interest rate plus the expected rate of inflation. The expected rate of inflation can be calculated by subtracting the percentage increase in real GDP from the percentage increase in the money supply. In this case, 7% - 5% = 2% inflation.

Using the Fisher equation, the nominal interest rate can be calculated as:

Nominal interest rate = Real interest rate + Expected inflation rate
Nominal interest rate = 6% + 2%
Nominal interest rate = 8%

Therefore, the correct answer is D) 8%.

Suppose the Money Supply Is Set to Grow at 7%,real