Which of the following is a characteristic of the 'Mundell-Tobin Effect'?
A. Inflation always raises the real interest rate
B. Only monetary neutrality holds
C. Inflation has no effect on capital accumulation
D. Higher inflation can reduce the real interest rate and raise capital accumulation in some portfolio-balance models
Answer: Option D
Solution (By JKSSB Mock Tests)
The Mundell-Tobin effect suggests that an increase in expected inflation may lower the real return on money, inducing a portfolio shift toward real capital and thereby raising steady-state capital intensity.
Explanation:
The law of diminishing returns (or variable proportions) operates in the short run when one or more factors are fixed and additional units of a variable factor are added.
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