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Question

Suppose the nominal interest rate is 7 per cent while the money supply is growing at a rate of 5 per cent per year. If the government increases the growth rate of the money supply from 5 per cent to 9 per cent, the Fisher effect suggests that, in the long run, the nominal interest rate should become

A 9 per cent Correct Answer Incorrect Answer
B 11 per cent. Correct Answer Incorrect Answer
C 4 per cent Correct Answer Incorrect Answer
D 16 per cent Correct Answer Incorrect Answer
E 12 per cent. Correct Answer Incorrect Answer

Solution

The nominal interest rate becomes 11% in the long run as per Fisher effect.

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