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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

    Solution

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

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