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

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15-04-2022
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Suppose that monetary neutrality and the fisher effect both hold. An increase in the money supply growth rate increases.

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Tundexi Tundexi · Answer 1 · 2022-04-25T12:11:15+02:00

Any increase in the money supply growth rate will increase the inflation rate and nominal interest rates if the monetary neutrality and the fisher effect both on hold.

What is monetary neutrality?

The theory holds that the changes in the money supply only affect the general prices, but not overall economic productivity.

What is the fisher effect?

The effect explains the relationship between inflation and real & nominal interest rates.

In conclusion, if the monetary neutrality and the fisher effect both hold, then, any increase in the money supply growth rate will increase the inflation rate and nominal interest rates