Question

The fed increases the quantity of money. in the short run, the quantity of money demanded ______ and the nominal interest rate ______

Answer 1

The fed increases the quantity of money. in the short run, the quantity of money demanded will have immediate effect and the nominal interest rate will fall.

This is because of the quantity theory of money.

According to the quantity theory of money, if the amount of money in the economy gets doubles, keeping all other things equal, price levels will also  gets double.

This means that the consumer will have to pay twice as much for the same amount of goods and services. This increase in price levels will eventually result in a rise of inflation level.

Inflation is a measure of the rate of rising prices of goods and services in any economy.

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