6. The Fisher effect and the cost of unexpected inflationSuppose the nominal interest rate on savings accounts is 11% per year, and both actual and expected inflation are equal to 6%.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 PeriodNominal Interest RateExpected InflationActual InflationExpected Real Interest RateActual Real Interest Rate(Percent)(Percent)(Percent)(Percent)(Percent)Before increase in MS1166 Immediately after increase in MS116 10 Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 6% to 10% per year.Complete the second row of the table by filling in the expected and actual real interest rates on savings accounts 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 toper year.

unexpected inflation costs accumulate when there is a mismatch between supply &demand of market…

Answered: 6. The Fisher effect and the cost of…

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 savings accounts is 11% per year, and both actual and expected inflation are equal to 6%.

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	6	6
Immediately after increase in MS	11	6	10		Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 6% to 10% per year. Complete the second row of the table by filling in the expected and actual real interest rates on savings accounts 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 to per year.

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