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 2%.Given this information,we would expect that
A)the nominal interest rate will rise by less than 2% in the medium run.
B)the nominal interest rate will rise by exactly 2% in the medium run.
C)the nominal interest rate will decrease by exactly 2% in the medium run.
D)the nominal interest rate will not change in the medium.
E)none of the above

Question

Quizplus · Accepted Answer

According to the Fisher effect, in the medium run, an increase in the nominal money growth rate leads to a proportional increase in the nominal interest rate, assuming inflation expectations adjust accordingly.

Suppose the Economy Is Initially Operating at the Natural Level