An increase in money supply causes the real interest rate to ________ and the price level to ________ in general equilibrium.
A)rise; rise
B)remain unchanged; fall
C)remain unchanged; rise
D)fall; fall

Question

Quizplus · Accepted Answer

An increase in money supply will lead to an increase in demand for goods and services, which will result in an increase in prices. This increase in prices will lead to a rise in the nominal interest rate. However, the rise in inflation will decrease the real interest rate, leaving the overall effect on the real interest rate unclear. Therefore, the real interest rate may either remain unchanged or rise slightly.

An Increase in Money Supply Causes the Real Interest Rate