Every week the Federal Reserve announces how quickly the money supply grew in the week ending ten...

Question

Every week the Federal Reserve announces how quickly the money supply grew in the week
ending ten days previously. (There is a ten-day delay because it takes that long to assemble data
on bank deposits.) Economists have noticed that when the announced increase in the money
supply is greater than expected, nominal interest rates rise just after the announcement; they fall
when the market learns the money supply grew more slowly than expected. Two competing
explanations of this phenomenon are
(1) Unexpectedly high money growth raises expected inflation and thus raises nominal interest
ates through the Fisher effect; and
(2) Unexpectedly high money growth leads the market to expect future Fed action to reduce the
money supply, causing a decrease in the amount of deposits supplied to the public by banks but
no increase in expected inflation....

David · Accepted Answer

Every week the Federal Reserve announces how quickly the money supply grew in the week 
ending ten days previously. (There is a ten-day delay because it takes that long to assemble data 
on bank deposits.) Economists have noticed that when the announced increase in the money 
supply is greater than expected, nominal interest rates rise just after the announcement; they fall 
when the market learns the money supply grew more slowly than expected. Two competing 
explanations of this phenomenon are 
(1) Unexpectedly high money growth raises expected inflation and thus raises nominal interest 
rates through the Fisher effect; and 
(2) Unexpectedly high money growth leads the market to expect future Fed action to reduce the 
money supply, causing a decrease in the amount of deposits supplied to the public by banks but 
no increase in expected inflation.

Every week the Federal Reserve announces how quickly the money supply grew in the week ending ten days previously. (There is a ten-day delay because it takes that long to assemble data on bank...

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