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

Question

a.

the inflation rate and the nominal interest rate by the same number of percentage points.
b.

the inflation rate but not the nominal interest.
c.

nominal interest rates but by less than the percentage point increase in the inflation rate.
d.

neither the inflation rate nor the nominal interest rate.

Answer 1

If both monetary neutrality and the Fisher effect hold, an increase in the money supply growth rate will lead to an increase in the inflation rate. According to the Fisher effect, the nominal interest rate will increase by the same amount as the inflation rate in the long run.

Therefore, the correct answer is:

a. the inflation rate and the nominal interest rate by the same number of percentage points.