An increase in the nominal interest rate,all else held constant,will always cause which of the following?
A)the real interest rate to decrease
B)the expected inflation rate to decrease
C)the demand for money to increase
D)all of the above
E) none of the above

Question

Quizplus · Accepted Answer

An increase in the nominal interest rate, all else held constant, does not necessarily cause the real interest rate to decrease, the expected inflation rate to decrease, or the demand for money to increase. The real interest rate is determined by the nominal interest rate and the inflation rate, but an increase in the nominal rate does not predict how the real rate will change without knowing what happens to inflation. Similarly, the expected inflation rate is influenced by various factors and not directly by the nominal interest rate alone. Lastly, an increase in the nominal interest rate typically reduces the demand for money, as holding money becomes more expensive compared to interest-bearing assets.

An Increase in the Nominal Interest Rate,all Else Held Constant,will