Asked by leslie harris on Jul 27, 2024
Verified
In recent years Venezuela and Ukraine have had much higher nominal interest rates than the United States while Japan has had lower nominal interest rates. What would you predict is true about money growth in these other countries? Why?
Nominal Interest Rates
Refer to the interest rates before adjustments for inflation, representing the face value of interest paid or received.
Money Growth
Money growth refers to the rate at which the supply of money in an economy increases, influencing inflation and economic activity.
Venezuela
A country located in the northern coast of South America, known for its significant oil reserves but also for its political, social, and economic challenges.
- Describe the influence of inflation on savings, the cost of borrowing, and economic choice-making.
Verified Answer
KW
Kenneth WhiteJul 30, 2024
Final Answer :
The Fisher effect says that increases in the inflation rate lead to one-to-one increases in nominal interest rates. The quantity theory says that in the long run, inflation increases one-to-one with money supply growth. It follows that differences in nominal interest rates may be due to differences in money supply growth rates. It is reasonable to guess that much higher nominal interest rates in Venezuela and Russia indicate higher money supply growth while lower interest rates in Japan indicate lower money supply growth.
Learning Objectives
- Describe the influence of inflation on savings, the cost of borrowing, and economic choice-making.