Suppose the economy is initially operating at the natural level of output.Now,suppose the central bank increases the rate of nominal money growth by 3%.Given this information,we would expect that
A)the real interest rate will increase by less than 3% in the medium run.
B)the real interest rate will increase by exactly 3% in the medium run.
C)the real interest rate will fall by exactly 3% in the medium run.
D)none of the above

Question

Quizplus · Accepted Answer

In the medium run, the real interest rate is determined by factors like productivity and preferences, not by nominal money growth. An increase in nominal money growth affects inflation but not the real interest rate in the medium run.

Suppose the Economy Is Initially Operating at the Natural Level