Answer to Question #279666 in Macroeconomics for Kaju

Question

an increase in monetary growth leads to decrease in nominal interest rates in the short run, but to an increase in nominal interest rates in the medium run. Explain.

Answer 1

In the long run, a higher rate of money growth leads to higher ongoing inflation with no effect on output or employment. The real interest rate returns to its previous level, while the nominal interest rate rises above its original level because people expect higher inflation.