Which of the following is a characteristic of the 'Mundell-Tobin Effect'?
A. Higher inflation can reduce the real interest rate and raise capital accumulation in some portfolio-balance models
B. Inflation always raises the real interest rate
C. Only monetary neutrality holds
D. Inflation has no effect on capital accumulation
Answer: Option A
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.
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