Question

a rise in nominal interest rate would cause

Answer 1

Nominal interest rate refers to the interest rate before taking inflation into account. Nominal can also refer to the advertised or stated interest rate on a loan, without taking into account any fees or compounding of interest.

Central banks set short-term nominal interest rates, which form the basis for other interest rates charged by banks and financial institutions. Nominal interest rates may be held at artificially low levels after a major recession to stimulate economic activity through low real interest rates, which encourage consumers to take out loans and spend money. However, a necessary condition for such stimulus measures is that inflation should not be a present or a near-term threat. Conversely, during inflationary times, central banks tend to set nominal rates high.

From the above discussions, we can say that-

a rise in nominal interest rate would cause an increase in the demand for loanable funds and hence an increase in money supply because people will take more loans and the level of economic activities will increase and hence finally there may be an increase in real GDP.