In the classical model, according to the quantity theory and the Fisher equation, an increase in money growth increases:
A) output.
B) velocity
C) the nominal interest rate.
D) the real interest rate.

Question

Quizplus · Accepted Answer

According to the quantity theory and the Fisher equation, an increase in money growth leads to an increase in the nominal interest rate. The quantity theory states that the quantity of money available in an economy determines the price level, and the Fisher equation states that the nominal interest rate is equal to the real interest rate plus the expected inflation rate. Therefore, an increase in the money supply leads to an increase in the expected inflation rate, which in turn leads to an increase in the nominal interest rate.

In the Classical Model, According to the Quantity Theory and the Fisher