An economics professor of a monetary economics course assigns the following shor

Question

An economics professor of a monetary economics course assigns the following short-answer assignment: “Differences in nominal interest rates are due to differences in money supply growth rates. In recent years, Russia has had much different nominal interest rates than the United States. How does the rate of growth of the money supply explain this occurrence and which country would thus be expected to have higher nominal interest rates?”

One of the students in the course, Javier, writes: “In response to inflation, banks and other creditors increase nominal interest rates so as to maintain purchasing power of their assets. Inflation results from increases in the money supply. It is reasonable to conclude that Russia has higher nominal interest rates than the U.S. because Russia has lower money supply growth.” Does Javier receive full credit, partial credit, or no credit for his answer?

A. Javier receives full credit, since what he wrote is completely correct.

B. Javier receives partial credit. In response to inflation, banks and other creditors decrease nominal interest rates.

C. Javier receives partial credit. Higher nominal interest rates in Russia indicate higher money supply growth in Russia than in the U.S.

D. Javier receives no credit, since what he wrote is completely incorrect.

Explanation / Answer

The country which is expected to have higher nominal interest rate is U.S. which is emerging revenues with business venture.
Javier receives partial credit. Higher nominal interest rates in Russia indicate higher money supply growth in Russia than in the U.S.. The correct answer is option (C). It happens because of lower money supply growth. The rate of inflation shows low market supply and low purchases in the market.

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