Suppose you have the following information on the Fed's and the European Central Bank's (ECB) policy rules: Fed real interest rate= 0.5 x (inflation - 2) ECB real interest rate = 0.2 x (inflation - 2) +1 If the inflation rate is 2 percent in each, what will be the real interest rate in the U.S. and the ECB area? Real interest rate in the U.S. = % Real interest rate in the ECB area =

Suppose you have the following information on the Fed's and the European Central Bank's (ECB) policy rules: Fed real interest rate= 0.5 x (inflation - 2) ECB real interest rate = 0.2 x (inflation - 2) +1 If the inflation rate is 2 percent in each, what will be the real interest rate in the U.S. and the ECB area? Real interest rate in the U.S. = % Real interest rate in the ECB area =

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 6WNG

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Suppose you have the following information on the Fed's and the European Central Bank's (ECB) policy rules:
Fed real interest rate = 0.5x (inflation - 2)
ECB real interest rate = 0.2 x (inflation -2) +1
If the inflation rate is 2 percent in each, what will be the real interest rate in the U.S. and the ECB area?
Real interest rate in the U.S. =%
Real interest rate in the ECB area =

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Suppose the nominal interest rate on savings accounts is 11% per year, and both actual and expected inflation are equal to 2%. 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 Expected Actual Inflation Inflation (Percent) (Percent) 2 2 2 to 7 The unanticipated change in inflation arbitrarily harms Expected 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 2% to 7% per year. Actual Real Interest Rate (Percent) 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). Now consider the long-run impact of the change in money growth and inflation. According to…
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