6. The Fisher effect and the cost of unexpected inflationSuppose the nominal interest rate on car loans is 12% per year, and both actual and expected inflation are equal to 3%.Complete the first row of the table by filling in the expected real interest rate and the actual real interest rate before any change in the money supply.Nominal InterestExpectedActualExpected Real InterestActual Real InterestRateInflationInflationRateRateTime Period(Percent)(Percent)(Percent)(Percent)(Percent)Before increase in MS12Immediately after increase1238.in MSNow suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 3% to 8% peryear.Complete the second row of the table by filling in the expected and actual real interest rates on car loans immediately after the increase in the moneysupply (MS).The unanticipated change in inflation arbitrarily harmsNow consider the long-run impact of the change in money growth and inflation. According to the Fisher effect, as expectations adjust to the new,higher inflation rate, the nominal interest rate willto% per year.

real rate = nominal rate - inflation

6. The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on car loans is 12% per year, and both actual and expected inflation are equal to 3%. Complete the first row of the table by filling in the expected real interest rate and the actual real interest rate before any change in the money supply. Nominal Interest Expected Actual Expected Real Interest Actual Real Interest Rate Inflation Inflation Rate Rate Time Period (Percent) (Percent) (Percent) (Percent) (Percent) Before increase in MS 12 Immediately after increase 12 3 in MS Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 3% to 8% per year. Complete the second row of the table by filling in the expected and actual real interest rates on car loans immediately after the increase in the money supply (MS). The unanticipated change in inflation arbitrarily harms Now consider the long-run impact of the change in money growth and inflation. According to the Fisher effect, as expectations adjust to the new, higher inflation rate, the nominal interest rate will v to % per year.

6. The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on car loans is 12% per year, and both actual and expected inflation are equal to 3%. Complete the first row of the table by filling in the expected real interest rate and the actual real interest rate before any change in the money supply. Nominal Interest Expected Actual Expected Real Interest Actual Real Interest Rate Inflation Inflation Rate Rate Time Period (Percent) (Percent) (Percent) (Percent) (Percent) Before increase in MS 12 Immediately after increase 12 3 in MS Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 3% to 8% per year. Complete the second row of the table by filling in the expected and actual real interest rates on car loans immediately after the increase in the money supply (MS). The unanticipated change in inflation arbitrarily harms Now consider the long-run impact of the change in money growth and inflation. According to the Fisher effect, as expectations adjust to the new, higher inflation rate, the nominal interest rate will v to % per year.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 20P

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6. The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on car loans is 11% per year, and both actual and expected inflation are equal to 4%. Complete the first row of the table by filling in the expected real interest rate and the actual real interest rate before any change in the money supply. Time Period Nominal Interest Rate Expected Inflation Actual Inflation Expected Real Interest Rate Actual Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) Before increase in MS 11 4 4 Immediately after increase in MS 11 4 6 Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 4% to 6% per year. Complete the second row of the table by filling in the expected and actual real interest rates on car loans immediately after the increase in the money supply (MS). The unanticipated change in inflation…
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