In the long run, a sustained increase in money supply growth relative to the growth rate of potential real output will most likely:
A)cause the nominal interest rate to fall.
B)cause the real interest rate to fall.
C)reduce the natural rate of unemployment.
D)none of the above

Question

In the long run, a sustained increase in money supply growth relative to the growth rate of potential real output will most likely:
A)​cause the nominal interest rate to fall.
B)​cause the real interest rate to fall.
C)​reduce the natural rate of unemployment.
D)​none of the above

Quizplus · Accepted Answer

In the long run, a sustained increase in money supply growth relative to the growth rate of potential real output is most likely to lead to inflation without affecting the real interest rate or the natural rate of unemployment. The nominal interest rate may rise due to the Fisher effect, which states that the nominal interest rate adjusts to the expected inflation rate. The real interest rate is determined by real factors such as productivity and savings, not the money supply. The natural rate of unemployment is also determined by real factors, such as the structure of the labor market and policies, not by the money supply.

In the Long Run, a Sustained Increase in Money Supply