6. 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. Time Period Nominal Interest Rate Expected Inflation Actual Inflation Expected Real Interest Rate Actual Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) Before increase in MS 13 4 4       Immediately after increase in MS 13 4  6

1.  In a specified year, nominal gross domestic product grew by 12 percent and real gross domestic product grew by 5 percent. What would be the inflation rate for this year? 7% -7% 8% 17% 2.  Which of the following could result in simultaneous increases in unemployment and inflation? Which of the following could result in simultaneous increases in unemployment and inflation? An increase in the overall level of productivity A decrease in government spending A decrease in the money supply An increase in the expectations of future inflation 3.  From 2017 to 2018, the unemployment fell from 4.3 to 3.9 percent while inflation fell from 3.2 to 1.4 percent. Which of the following is a valid reason behind these changes? Aggregate supply curve shifted to the right Aggregate supply curve shifted to the left Aggregate demand curve shifted to the right Aggregate demand curve shifted to the left 4.  According to the law of diminishing marginal utility, which of the following choices…

1. Calculating inflation using a simple price index Consider an imaginary price index, the Undergraduate Price Index (UPI), created to represent the annual purchases made by a typical undergradute. The following table contains information on the market basket for the UPI and the price of each good in 2020, 2021, and 2022. The cost of each good in the basket as well as the basket's total cost are given for 2020. Perform these same calculations for 2021 and 2022, and enter the results in the following table Streaming services Iced coffees Textbooks Notebooks Energy drinks Total cost Price index Quantity in Basket 1 150 10 8 40 Suppose this price Index uses 2020 as the base year 2020 Price (Dollars) 64 2 80 2 3 Between 2020 and 2021, the UPI increased by Cost (Dollars) 64 300 800 16 120 1.300 100 Price (Dollars) 104 2 85 2 4 2021 In the last row of the cable, calculate and enter the value of the UPI for the remaining years Cost (Dollars) Price Cost (Dollars) (Dollars) 134 2 105 4 5 2022…

1. Calculating inflation using a simple price index Consider an imaginary price index, the Undergraduate Price Index (UPI), created to represent the annual purchases made by a typical undergradute. The following table contains information on the market basket for the UPI and the price of each good in 2020, 2021, and 2022. The cost of each good in the basket as well as the basket's total cost are given for 2020. Perform these same calculations for 2021 and 2022, and enter the results in the following table. Streaming services Iced coffees Textbooks Notebooks Energy drinks Total cost Price index Quantity in Basket 1 150 10 8 40 Price (Dollars) 64 2 Suppose this price index uses 2020 as the base year. 2020 80 2 3 Cost (Dollars) 64 300 800 16 120 1,300 100 Price (Dollars) 104 2 85 2 2021 Cost (Dollars) In the last row of the table, calculate and enter the value of the UPI for the remaining years. Between 2020 and 2021, the UPI Increased by 104 300 850 16 160 1,430 110) Between 2021 and…

8. Inflation-induced tax distortions Musashi receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario. Given the real interest rate of 4.5% per year, find the nominal interest rate on Musashi's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) 2.0 4.5       9.5 4.5       Compared with lower inflation rates, a higher inflation rate will __increase/decrease__the…

8. Inflation-induced tax distortions Musashi receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high- inflation scenario. Given the real interest rate of 4.5% per year, find the nominal interest rate on Musashi's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) 2.0 4.5 7.0 4.5 the after-tax real interest rate when the government taxes Compared with higher inflation rates, a lower inflation rate will the quantity of investment in the…

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. Time Period Before increase in MS Immediately after increase in MS Nominal Interest Rate (Percent) 13 13 Expected Inflation (Percent) 4 4 The unanticipated change in inflation arbitrarily benefits Actual Inflation (Percent) 4 6 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 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). Now consider the long-run impact of the change in money growth and inflation. According to the Fisher…

8. Inflation-induced tax distortions Ashwin receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high- inflation scenario. Given the real interest rate of 4.5% per year, find the nominal interest rate on Ashwin's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate (Percent) (Percent) (Percent) (Percent) 2.5 4.5 7.0 4.5 Compared with higher inflation rates, a lower inflation rate will nominal interest income. This tends to the economy's long-run growth rate. saving, thereby After-Tax Real Interest Rate (Percent) the…

1. The index number representing the price level changes from 110 to 115 in 2019, and then from 115 to 120 in 2020. Since the index number increases by 5 this year, is five the inflation rate each year? Is the inflation rate the same each year?. NOTE: Explain and support the answer with calculations. 2. The total price of purchasing a basket of goods over four years is; year 1 - P940 year 2 - P970 year 3 - P1,000 year 4 - P1,070 Calculate two price indicates, one using year 1 as the base year (set equal to 100) and the other using the year 4 as the base year (set equal to 100). NOTE: Explain and support the answer with calculations.

12. Inflation-induced tax distortions Ashwin receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a low-inflation scenario and a high- inflation scenario. Given the real interest rate of 4.5% per year, find the nominal interest rate on Ashwin's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate (Percent) (Percent) (Percent) (Percent) 2.5 4.5 7.0 4.5 Compared with higher inflation rates, a lower inflation rate will nominal interest income. This tends to ▼saving, thereby the economy's long-run growth rate. After-Tax Real Interest Rate (Percent) the…