In the long run, an increase in the growth rate of the money supply ________ the inflation rate and ________ the nominal interest rate.
A) raises; raises
B) raises; lowers
C) lowers; raises
D) lowers; lowers
E) raises; does not change

Question

Quizplus · Accepted Answer

In the long run, an increase in the growth rate of the money supply raises the inflation rate due to more money chasing the same amount of goods, leading to higher prices. According to the Fisher effect, this also raises the nominal interest rate, as lenders demand higher rates to compensate for the decrease in purchasing power.

In the Long Run, an Increase in the Growth Rate