3. The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on car loans is 13% per year, and both actual and expected inflation are equal to 4%. 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 Time Period Rate (Percent) Expected Inflation (Percent) Actual Inflation (Percent) Expected Real Interest Rate (Percent) Actual Real Interest Rate (Percent) Before increase in MS 13 4 4 Immediately after increase 13 4 6 in MS Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 4% to 6% per year. Complete the second row of the table by filling in the expected and actual real interest rates on car loans 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.
3. The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on car loans is 13% per year, and both actual and expected inflation are equal to 4%. 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 Time Period Rate (Percent) Expected Inflation (Percent) Actual Inflation (Percent) Expected Real Interest Rate (Percent) Actual Real Interest Rate (Percent) Before increase in MS 13 4 4 Immediately after increase 13 4 6 in MS Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 4% to 6% per year. Complete the second row of the table by filling in the expected and actual real interest rates on car loans 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.
Brief Principles of Macroeconomics (MindTap Course List)
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Chapter6: Measuring The Cost Of Living
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Transcribed Image Text:3. The Fisher effect and the cost of unexpected inflation
Suppose the nominal interest rate on car loans is 13% per year, and both actual and expected inflation are equal to 4%.
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
Time Period
Before increase in MS
Rate
(Percent)
Expected
Inflation
Actual
(Percent)
Inflation
(Percent)
Expected Real Interest
Rate
(Percent)
Actual Real Interest
Rate
(Percent)
13
4
4
Immediately after increase
13
4
6
in MS
Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 4% to 6% per
year.
Complete the second row of the table by filling in the expected and actual real interest rates on car loans 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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