Answer to Question #58692 in Macroeconomics for bre

Question

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?

Answer 1

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%.