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. 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 11 Immediately after increase 11 in MS 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 arbitrarily benefits 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.

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. 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 11 Immediately after increase 11 in MS 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 arbitrarily benefits 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.

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter18: Introduction To Macroeconomics: Unemployment, Inflation, And Economic Fluctuations

Section: Chapter Questions

Problem 13P

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Similar questions

The total price of purchasing a basket of goods in the United Kingdom over four years is: year 1=940, year 2=970, year 3=1000, and year 4=1070. Calculate two price indices, one using year 1 as the base year (set equal to 100) and the other using year 4 as the base year (set equal to 100). Then, calculate the inflation rate based on the first price index. If you had used the other price index, would you get a different inflation rate? If you are unsure, do the calculation and find out.
If inflation rises unexpectedly by 5, indicate for each of the following whether the economic actor is helped, hurt, or unaffected: A union member with a COLA wage contract Someone with a large stash of cash in a safe deposit box A bank lending money at a fixed rate of interest A person who is not due to receive a pay raise for another 11 months
Assuming the nominal interest rate is positive, ceteris paribus, which of the following statements is correct? a. If the nominal interest rate is 4 percent and the inflation rate is 3 percent, then the real interest rate is 7 percent. b. When the inflation rate is positive, ceteris paribus, the real interest rate will be less than the nominal interest rate. c. When the inflation rate is zero, ceteris paribus, the nominal interest rate will be less than the real interest rate. d. If the nominal interest rate is 5 percent and the inflation rate is 2 percent, then the real interest rate is -3 percent.
After experiencing the new equilibrium inflation rate and its effect on their real wage, workers realize that the equilibrium inflation rate has changed, and their real wage has changed. Suppose that they change their expected inflation rate and accept to lower the growth rate of nominal wage by the same amount as the change in the equilibrium inflation rate. What motivates the workers to accept this change in their expected inflation rate?