Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 30, Problem 5QR
To determine
Fisher effect.
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Why does inflation have a positive effect on the nominal interest rate?
What is the difference between interest rates and inflation rates? Give an example of each.
: According to the Fisher effect, how does an increase in the inflation rate affect the real interest rate and the nominal interest rate?
Chapter 30 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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- Distinguish between the general inflation rate and the average inflation rate for specific goods?arrow_forwardTrue or false? The nominal rate of interest is the difference between the real rate and the expected rate of inflation.arrow_forwardWhich of the following combinations of real interest rates and inflation implies a nominal interest rate of 7 percent? a real interest rate of 5.5 percent and an inflation rate of 3 percent a real interest rate of 4 percent and an inflation rate of 11 percent a real interest rate of 6 percent and an inflation rate of 1 percent a real interest rate of 2.5 percent and an inflation rate of 2 percentarrow_forward
- Research suggests that macroeconomic factors can explain the dynamics of interest rates in the economy. Suppose we are interested in understanding whether inflation plays a role in explaining interest rates. Fitting a line between the current nominal interest rate i and current inflation we obtain: i = 0.041 -0.147 What is the expected level of interest rates when inflation is at the level of 4%?arrow_forwardHow is the Inflation-free interest rate an estimate of the true earning power of money?arrow_forwardSuppose banks require a real interest rate of 10 percent. If they expect inflation to be 2 percent, what is the nominal interest rate? Multiple Choice 5 percent 20 percent 8 percent 12 percentarrow_forward
- Suppose a nominal interest rate is 12%, and the expected rate of inflation is 9%. If next year the expected rate of inflation rises to 11%, what would most likely happen as a result?arrow_forwardAssume that the nominal interest rate is 8% in 2020, with inflation at 3%. a. According to the Fisher effect, what will happen to the nominal interest rate if inflation goes to 8%? b. If someone borrowed $1 million in 2020 at 8% (promising to pay $1,080,000 in one year) and paid back the loan one year later when inflation had unexpectedly gone to 8%, what would be the real interest rate on this loan?arrow_forwardWhy do some economists believe that it may be necessary to live with a certain amount of inflation in order to keep the unemployment rate at a low level?arrow_forward
- Suppose the Federal Reserve begins to increase the supply of money at an increasing rate. What impact would that have on GDP, unemployment, and inflation?arrow_forwardEconomists sometimes argue that moderate inflation may help the economy by making wages in labor markets more ["", "", ""] . The discussion in the text pointed out that wages tend to be sticky in their downward movements and that unemployment can result. A little inflation could nibble away at ["", ""] wages, and thus help real wages to ["", ""] if necessary. In this way, even if a moderate or high rate of inflation may act as sand in the gears of the economy, perhaps a low rate of inflation serves as oil for the gears of the labor market. This argument is controversial. A full analysis would have to account for all the effects of inflation. It does, however, offer another reason to believe that, all things considered, very low rates of inflation may not be especially harmful.arrow_forwardExplain with the aid of a diagram, the effect of the market rate of interest being greater than the natural rate of interest on the general price level. Will this discrepancy between the two rates lead to inflation? deflation?arrow_forward
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