If the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in:
A) inflation of 1 percent and the nominal interest rate of less than 1 percent.
B) inflation of 1 percent and the nominal interest rate of 1 percent.
C) inflation of 1 percent and the nominal interest rate of more than 1 percent.
D) both inflation and the nominal interest rate of less than 1 percent.

Question

Quizplus · Accepted Answer

The quantity theory of money suggests that a 1 percent increase in the money supply, with real output (national income) and velocity of money constant, will lead to a 1 percent increase in the price level (inflation). The Fisher effect states that the nominal interest rate adjusts one-for-one with expected inflation, meaning a 1 percent increase in inflation leads to a 1 percent increase in the nominal interest rate, assuming the real interest rate is constant.

If the Real Interest Rate and Real National Income Are