Question

According to the quantity theory of money, a 5 percent increase in money growth increases inflation by ___ percent. According to the Fisher equation, a 5 percent increase in the rate of inflation increases the nominal interest rate by ____ percent.

Answer 1

Answer:

both blanks can be filled by 5%

Explanation:

The quantity theory of money states that there is a proportional relationship between the money supply and the general level of prices. An increase in the money supply will increase the general level of prices in the same proportion (called inflation).

The Fisher equation measures the relationship between nominal and real interest rates. Real interest rate = nominal interest rate - inflation rate.

So if inflation increases, the nominal inflation rate will increase to keep the real interest rate the same.