If the Fed wants to lower the nominal interest rate in the long run, the Fed ________ the growth rate of the quantity of money.
A) raises
B) lowers
C) does not change
D) first lowers and then raises
E) None of the above answers are correct because the premise of the question is wrong since the Fed cannot affect the nominal interest rate, only the real interest rate.

Question

Quizplus · Accepted Answer

According to the Quantity Theory of Money, which assumes that the velocity of money is constant, the nominal interest rate is directly proportional to the growth rate of the quantity of money. Therefore, if the Fed wants to lower the nominal interest rate, it needs to lower the growth rate of the quantity of money.

If the Fed Wants to Lower the Nominal Interest Rate