Suppose that velocity and output are constant,the quantity theory and Fisher effect are correct,the nominal interest rate is 7 percent,and money growth is 3 percent.Which statement is consistent with these facts?
A) The real interest rate is 3 percent,and nominal wages are rising.
B) The real interest rate is 3 percent,and real wages are rising.
C) The real interest rate is 4 percent,and nominal wages are rising.
D) The real interest rate is 10 percent,and real wages are rising.

Question

Quizplus · Accepted Answer

The Fisher effect states that the nominal interest rate is the sum of the real interest rate and the inflation rate. With a nominal interest rate of 7% and money growth (inflation) of 3%, the real interest rate is 4%. Since inflation is positive, nominal wages are likely rising.

Suppose That Velocity and Output Are Constant,the Quantity Theory and Fisher