According to the Fisher effect, the nominal interest rate will increase by 4% if theA. expected real interest rate increases by 4%.B. actual inflation rate exceeds the expected inflation rate by 4%.C. expected inflation rate increases by 4%.D. expected inflation rate decreases by 4%.

This describes the relationship between nominal and real interest rates when inflation is included…

Answered: According to the Fisher effect, the…

Principles of Economics, 7th Edition (MindTap Course List)

7th Edition

ISBN:9781285165875

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter35: The Short-Run Trade-off Between Inflation And Unemployment

Section: Chapter Questions

Problem 4QCMC

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Suppose the interest rate that banks in Techland charge one another for overnight loans is 5 percent, the long-term nominal interest rate is 4.5 percent, and the long-term expected inflation rate is 3 percent. What is the long-term expected real interest rate? How will the long-term expected real interest rate be affected if the central bank of Techland starts purchasing government bonds from banks?
Time Period nominal interest rate percent Expected Inflation (Percent) Actual Inflation (Percent) Expected Real Interest Rate Actual Real Interest Rate Before increase in MS 10 2 2 Immediately after increase in MS 10 2 5 Suppose the nominal interest rate on savings accounts is 10% per year, and both actual and expected inflation are equal to 2%. 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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According to the Fisher effect, the nominal interest rate will increase by 4% if the A. expected real interest rate increases by 4%. B. actual inflation rate exceeds the expected inflation rate by 4%. C. expected inflation rate increases by 4%. O D. expected inflation rate decreases by 4%.