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 6%. 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) 11 11 to Expected Inflation Actual Inflation (Percent) (Percent) 6 6 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 6% 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). The unanticipated change in inflation arbitrarily harms 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 % 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 6%. 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) 11 11 to Expected Inflation Actual Inflation (Percent) (Percent) 6 6 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 6% 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). The unanticipated change in inflation arbitrarily harms 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 % per year.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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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 11% per year, and both actual and
expected inflation are equal to 6%.
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)
11
to
11
Expected Actual
Inflation Inflation
(Percent) (Percent)
6
6
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 6% 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).
The unanticipated change in inflation arbitrarily harms
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
% per year.
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