Suppose the Australian money supply (M) grows at 4% in 2021, real GDP (Y) grows at 2%, the real interest rate (r) is -1%, and the money demand function is as follows. (M/P) = 0.7Y Based on the above information, answer the following questions. (a) Calculate the nominal interest rate (i), assuming the quantity theory of money holds. (b) Suppose the Reserve Bank of Australia (RBA) announces it will tighten its monetary policy in 2022, resulting in the Australian public expecting inflation to change to 1%. Assuming the nominal interest rate is unchanged at the 2021 level, what is the ex-ante real interest rate in 2022? (c) Assume the Fisher effect holds, and the real interest rate remains constant at
Suppose the Australian money supply (M) grows at 4% in 2021, real GDP (Y) grows at 2%, the real interest rate (r) is -1%, and the money demand function is as follows. (M/P) = 0.7Y Based on the above information, answer the following questions. (a) Calculate the nominal interest rate (i), assuming the quantity theory of money holds. (b) Suppose the Reserve Bank of Australia (RBA) announces it will tighten its monetary policy in 2022, resulting in the Australian public expecting inflation to change to 1%. Assuming the nominal interest rate is unchanged at the 2021 level, what is the ex-ante real interest rate in 2022? (c) Assume the Fisher effect holds, and the real interest rate remains constant at
Chapter13: Inflation
Section: Chapter Questions
Problem 16SQ
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![Suppose the Australian money supply (M) grows at 4% in 2021, real GDP (Y) grows
at 2%, the real interest rate (r) is -1%, and the money demand function is as follows.
(M/P)d = 0.7Y
Based on the above information, answer the following questions.
(a) Calculate the nominal interest rate (i), assuming the quantity theory of money
holds.
(b) Suppose the Reserve Bank of Australia (RBA) announces it will tighten its
monetary policy in 2022, resulting in the Australian public expecting inflation to
change to 1%. Assuming the nominal interest rate is unchanged at the 2021
level, what is the ex-ante real interest rate in 2022?
(c) Assume the Fisher effect holds, and the real interest rate remains constant at
the 2021 level. If expected inflation for 2023 is 2%, what will the nominal
exchange rate be in 2023? Motivate your answer.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F51bede7c-120b-4d00-9a62-54a30e43be29%2F020b350d-a084-4b2b-ad03-211f74702d10%2Fsoxej1j_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Suppose the Australian money supply (M) grows at 4% in 2021, real GDP (Y) grows
at 2%, the real interest rate (r) is -1%, and the money demand function is as follows.
(M/P)d = 0.7Y
Based on the above information, answer the following questions.
(a) Calculate the nominal interest rate (i), assuming the quantity theory of money
holds.
(b) Suppose the Reserve Bank of Australia (RBA) announces it will tighten its
monetary policy in 2022, resulting in the Australian public expecting inflation to
change to 1%. Assuming the nominal interest rate is unchanged at the 2021
level, what is the ex-ante real interest rate in 2022?
(c) Assume the Fisher effect holds, and the real interest rate remains constant at
the 2021 level. If expected inflation for 2023 is 2%, what will the nominal
exchange rate be in 2023? Motivate your answer.
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