ECONOMICS
INFLATION
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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A one-to-one adjustment of the nominal interest rate to the inflation rate
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Inflation is the growth in the quantity of money
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When the rate of inflation rises, the nominal interest rate rises by the same amount
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The real interest rate stays the same
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Detailed explanation-1: -The Fisher Effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. Therefore, real interest rates fall as inflation increases, unless nominal rates increase at the same rate as inflation.
Detailed explanation-2: -The quantity theory of money, sometimes called “The Fisherian Theory” simply states that a change in price can be related to a change in the money supply. In simple terms, it states that the quantity of money available (money supply) in the economy and the price levels have the same growth rates in the long run.
Detailed explanation-3: -So what causes inflation? Inflation is caused when the money supply in an economy grows at faster rate than the economy’s ability to produce goods and services. In our auction economy the production of goods and services was unchanged, but the money supply grew from round one to round two.
Detailed explanation-4: -Empirical evidence finds no support for a short-run Fisher effect in which a change in expected inflation is associated with a change in interest rates, but supports the existence of a long-run Fisher effect in which inflation and interest rates have a common stochastic trend when they exhibit trends.