Suppose the money supply is set to grow at 12%,real GDP grows at 4%,and the nominal interest rate on Aaa corporate bonds is 10%.Using the quantity theory of money and the Fisher equation,the expected real interest rate on Aaa corporate bonds should average

Question

Quizplus · Accepted Answer

According to the quantity theory of money, the inflation rate is approximately the growth rate of the money supply minus the growth rate of real GDP, which is 12% - 4% = 8%. The Fisher equation states that the nominal interest rate is the sum of the real interest rate and the expected inflation rate. Therefore, the expected real interest rate is 10% (nominal rate) - 8% (inflation rate) = 2%.

Suppose the Money Supply Is Set to Grow at 12%,real