The economy of Macro Island is described by the quantity equation with constant velocity. All residents of Macro Island understand the quantity theory and use it to form their expectations of inflation. Real income grows at a steady 2 percent per year, and the nominal interest rate is 5 percent. In one year, people had expected the money supply to grow by 4 percent, but in fact it grew by only 3 percent.   a. What was the inflation rate? (3% 4% 1% 2%)   b. What was the expected inflation rate? (1% 4% 3% 2%)   c. What was the ex ante real interest rate? (4% 2% 1% 3%)   d. What was the ex post real interest rate? (2% 1% 4% 3%)   e. Did the deviation of inflation from what was expected hurt creditors or debtors? ( Creditors Debtors)

ECON MACRO
5th Edition
ISBN:9781337000529
Author:William A. McEachern
Publisher:William A. McEachern
Chapter15: Monetary Theory And Policy
Section: Chapter Questions
Problem 3.7P
icon
Related questions
Question

The economy of Macro Island is described by the quantity equation with constant velocity. All residents of Macro Island understand the quantity theory and use it to form their expectations of inflation. Real income grows at a steady 2 percent per year, and the nominal interest rate is 5 percent. In one year, people had expected the money supply to grow by 4 percent, but in fact it grew by only 3 percent.

 

a. What was the inflation rate? (3% 4% 1% 2%)

 

b. What was the expected inflation rate? (1% 4% 3% 2%)

 

c. What was the ex ante real interest rate? (4% 2% 1% 3%)

 

d. What was the ex post real interest rate? (2% 1% 4% 3%)

 

e. Did the deviation of inflation from what was expected hurt creditors or debtors? ( Creditors Debtors)

Expert Solution
steps

Step by step

Solved in 5 steps with 14 images

Blurred answer
Knowledge Booster
Central Bank
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Recommended textbooks for you
ECON MACRO
ECON MACRO
Economics
ISBN:
9781337000529
Author:
William A. McEachern
Publisher:
Cengage Learning
Brief Principles of Macroeconomics (MindTap Cours…
Brief Principles of Macroeconomics (MindTap Cours…
Economics
ISBN:
9781337091985
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Principles of Economics, 7th Edition (MindTap Cou…
Principles of Economics, 7th Edition (MindTap Cou…
Economics
ISBN:
9781285165875
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Principles of Macroeconomics (MindTap Course List)
Principles of Macroeconomics (MindTap Course List)
Economics
ISBN:
9781305971509
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Principles of Macroeconomics (MindTap Course List)
Principles of Macroeconomics (MindTap Course List)
Economics
ISBN:
9781285165912
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning