According to the quantity theory and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will be:

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The question connects the quantity theory and the Fisher equation to determine the nominal interest rate.
Option a: 2 percent. This would reflect only the real interest rate and ignores the expected rate of inflation, which is needed to form the nominal rate according to the Fisher equation.
Option b: 3 percent. This matches the expected inflation rate if money growth translates directly into inflation, but it neglects the real interest component that should be added to obtain the nominal rate.
Option c: 5 percent. According to the Fisher equation, nominal rate ≈ real rate + inflation. Here the real rate is 2 percent and inflation arising from money growth is 3 percent, so 2% + 3% = 5%. This is the correct synthesis of the given data.
Option d: 6 percent. This would imply inflation of 4 percent when the real rate is 2 percent, which is inconsistent with the given information that money growth is 3 percent and the standard link to inflation in this setup.
In summary, the Fisher relation requires adding the real rate to the anticipated inflation from money growth; therefore 2% + 3% yields 5% as the nominal rate.

BU.220.610.51.FA25 M8 Final Comprehensive Exam - Multiple Choice Questions- Requires Respondus LockDown Browser

According to the quantity theory and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will be:

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