In the short run, the nominal interest rate is affected by changes in the money supply perceived to be temporary, but once ____ adjust(s), the nominal interest rate ____ in the long run.
A) the supply of money; rises
B) the price level; will revert to its former level
C) expectations of interest rates; falls
D) real GDP; does not change

Question

Quizplus · Accepted Answer

According to the Fisher effect, in the long run, changes in the nominal interest rate are fully reflected in the inflation rate, which is driven by changes in the price level. Therefore, if the money supply was temporarily increased to decrease the nominal interest rate, once the price level adjusts to higher inflation, the nominal interest rate will revert to its former level. Thus, the correct answer is B.

In the Short Run, the Nominal Interest Rate Is Affected