6. The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on savings accounts is 11% per year, and both actual and expected inflation are equal to 5%. 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 5. Immediately after increase 11 5 6. in MS Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 5% to 6% 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). 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 v to % per year.

6. The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on savings accounts is 11% per year, and both actual and expected inflation are equal to 5%. 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 5. Immediately after increase 11 5 6. in MS Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 5% to 6% 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). 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 v 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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19 The following is TRUE about monetary policy EXCEPT, It relates to revenue and expenditure by government budget. It manages the creation and flow of money and credit in the economy. It aims to control the money supply and regulate the monetary sector. It uses interest rate and money supply as monetary tools.
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INTEREST RATE (Percent) 18 15 2 so 3 0 0 20 Money Supply Money Demand 40 60 80 MONEY (Billions of dollars) 100 120 Money Demand Money Supply Following the price level increase, the quantity of money demanded at the initial interest rate of 9% will be supplied by the Fed at this interest rate. As a result, individuals will attempt to will bonds and other interest-bearing assets, and bond issuers will realize that they equilibrium is restored in the money market at an interest rate of % than the quantity of money their money holdings. In order to do so, they interest rates until
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