Question

Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth rate increases

a. the inflation rate and real interest rates.
b. the inflation rate, but not real interest rates.
c. real interest rates, but not the inflation rate.
d. neither the inflation rate nor real interest rates.

Answer 1

b. the inflation rate, but not real interest rates.

Step-by-step explanation:

An increase in money supply in the economy means that there is more money in the economy which leads to inflation. Therefore, inflation rate will increase. The nominal interest rate will increase as well by the same percentage. Real interest rate which measures the purchasing power will not increase since it will take more money to buy goods and services in the economy.