Answered: Suppose the nominal interest rate on…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

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 (MS).

NOTE:

Options for drop down questions are as follows

The unanticipated change in inflation arbitrarily benefits _____ (banks or depositors)

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 ______ (rise or fall) to ____%

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
(MS).
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
Immediately after increase
11
in MS
Now suppose the Bank of Canada 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
to
per year.

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