Suppose the nominal interest rate on savings accounts is 12% per year, and both actual and expected inflation are equal to 7%. 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 Time Period Rate (Percent) Inflation (Percent) Actual Inflation (Percent) Expected Real Interest Rate (Percent) Actual Real Interest Rate (Percent) Before increase in MS 12 7 7 Immediately after increase 12 7 10 in MS Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 7% 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 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.

Suppose the nominal interest rate on savings accounts is 12% per year, and both actual and expected inflation are equal to 7%. 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 Time Period Rate (Percent) Inflation (Percent) Actual Inflation (Percent) Expected Real Interest Rate (Percent) Actual Real Interest Rate (Percent) Before increase in MS 12 7 7 Immediately after increase 12 7 10 in MS Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 7% 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 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.

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter14: Money And The Economy

Section: Chapter Questions

Problem 12QP

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