Question #58692

Suppose the real rate of interest is 3%, and the money supply is growing at 5%. If the growth rate of the money supply

rises to 10%, then, according to the Fisher effect,

what is the change in the

real rate of interest?

nominal rate of interest?

rises to 10%, then, according to the Fisher effect,

what is the change in the

real rate of interest?

nominal rate of interest?

Expert's answer

If the real rate of interest is 3%, and the money supply is growing at 5%, then if the growth rate of the money supply rises to 10%, then, according to the Fisher effect, which states that the real interest rate equals the nominal interest rate minus the expected inflation rate,

the change in the real rate of interest will be zero, but the nominal rate of interest will increase by 5% from 3%+5% = 8% to 8% + (10% - 5%) = 13%.

the change in the real rate of interest will be zero, but the nominal rate of interest will increase by 5% from 3%+5% = 8% to 8% + (10% - 5%) = 13%.

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