Suppose that velocity and output are constant and that the quantity theory and Fisher effect are both correct.If the nominal interest rate is 8 percent and inflation is 4 percent,what is the money supply growth rate or the real interest rate?
A) The money supply growth rate is 4 percent.
B) The real interest rate is 12 percent.
C) The real interest rate is 8 percent.
D) The money supply growth rate is 12 percent.

Question

Quizplus · Accepted Answer

According to the quantity theory of money, if velocity and output are constant, the money supply growth rate equals the inflation rate, which is 4 percent. The Fisher effect states that the nominal interest rate is the sum of the real interest rate and the inflation rate. Given a nominal interest rate of 8 percent and inflation of 4 percent, the real interest rate is 4 percent, but this is not an option provided.

Suppose That Velocity and Output Are Constant and That the Quantity