1. Supose that velocity of money and out put are . Gulf constant and the frsher...

1. Supose that velocity of money and out put are . Gulf constant and the frsher effect both hold what happens to inflation real interest rate and nominal interest rate when the money supply growth rate increases from (0%) to (5%)?
note : by which one fexd and which one increases
short answer required

Expert Solution

Given the information that money supply growth rate increases from 0% to 5%

Inflation would increase. Because given the supply for goods and services, increase in the money supply will lead to an increase in the demand for goods and services. As a result, the prices would tend to go up. Since the velocity of money and output are not given, it is not possible to calculate the increase in price level.
Nominal interest rate is expected to decrease because increase in money supply implies that banks have more funds to lend; they have more liquidity. Therefore, they may charge a lower interest rate. On the other hand, from the demand side perspective, increase in money supply for given money demand, would imply that people have extra funds to invest in financial instruments. As a result, there will be a greater demand for financial instruments like stocks and bonds; their prices will go up and hence, interest rate will go down.
If nominal interest goes down and inflation goes up, then real interest rate expressed as the difference between the two is expected to fall.

Rahul Sunny answered 1 year ago

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