3. The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on car loans is 13% 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 Time Period Rate (Percent) Expected Inflation (Percent) Actual Inflation (Percent) Expected Real Interest Rate (Percent) Actual Real Interest Rate (Percent) Before increase in MS 13 4 4 Immediately after increase 13 4 6 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.

3. The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on car loans is 13% 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 Time Period Rate (Percent) Expected Inflation (Percent) Actual Inflation (Percent) Expected Real Interest Rate (Percent) Actual Real Interest Rate (Percent) Before increase in MS 13 4 4 Immediately after increase 13 4 6 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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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