If the demand for money depends on the nominal interest rate, then via the quantity theory and the Fisher equation, the price level depends on:
A) only the current money supply.
B) only the expected future money supply.
C) both the current and expected future money supply.
D) neither the current nor the expected future money supply.

Question

Quizplus · Accepted Answer

The quantity theory states that the price level is directly proportional to the money supply, and the Fisher equation establishes the relationship between the nominal interest rate, the inflation rate, and the real interest rate. Given that the demand for money depends on the nominal interest rate, it follows that both the current and expected future money supply will affect the price level.

If the Demand for Money Depends on the Nominal Interest