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Suppose the Fed decides to increase the nominal money supply using an open market purchase. The end result of the money creation sequence of events...
1. Suppose the Fed decides to increase the nominal money supply using an open market purchase. The end result of the money creation sequence of events shows a decrease in the federal funds rate. According to the Quantity Equation, the nominal money supply increase should result in an increase in inflation or an increase in real GDP, or both. (Assume both inflation and real GDP increase). Now consider the Fisher Effect.What does the Fisher Effect say about the relationship between the nominal interest rate (e.g., the federal funds rate) and the inflation rate? How can this be reconciled with the implication from the Equation of Exchange given an increase in the nominal money supply? Explain (after you have thought about this for a bit).
