Suppose the nominal interest rate on savings accounts is 12% per year, and both actual and expected inflation are equal to 7%. 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 Before increase in MS Immediately after increase in MS Nominal Interest Rate (Percent) 12 12 Expected Inflation (Percent) 7 7 Actual Inflation (Percent) 7 10 The unanticipated change in inflation arbitrarily benefits Expected Real Interest Rate (Percent) Actual Real Interest Rate (Percent) Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 7% 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). 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 savings accounts is 12% per year, and both actual and expected inflation are equal to 7%. 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 Before increase in MS Immediately after increase in MS Nominal Interest Rate (Percent) 12 12 Expected Inflation (Percent) 7 7 Actual Inflation (Percent) 7 10 The unanticipated change in inflation arbitrarily benefits Expected Real Interest Rate (Percent) Actual Real Interest Rate (Percent) Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 7% 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). 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.
Brief Principles of Macroeconomics (MindTap Course List)
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Author:N. Gregory Mankiw
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Chapter6: Measuring The Cost Of Living
Section: Chapter Questions
Problem 9PA
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Transcribed Image Text:6. The Fisher effect and the cost of unexpected inflation
Suppose the nominal interest rate on savings accounts is 12% per year, and both actual and expected inflation are equal to 7%.
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
Before increase in MS
Immediately after increase
in MS
Nominal Interest
Rate
(Percent)
12
12
Expected
Inflation
(Percent)
7
7
The unanticipated change in inflation arbitrarily benefits
Actual
Inflation
(Percent)
7
10
Expected Real Interest
Rate
(Percent)
Actual Real Interest
Rate
(Percent)
Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 7% 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).
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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