Gg.57. 6. The Fisher effect and the cost of unexpected inflationSuppose the nominal interest rate on savings accounts is 12% 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.Time PeriodBefore increase in MS.Immediately after increasein MSNominal InterestRate(Percent)1212ExpectedInflation(Percent)55ActualInflation(Percent)S10The unanticipated change in inflation arbitranly benefitsExpected Real InterestRate(Percent)Actual Real InterestRate(Percent)Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 5% to 10% peryear.Complete the second row of the table by filling in the expected and actual real interest rates on savings accounts immediately after the increasethe money supply (MS).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.

Real and nominal interest rates are two different concepts used in finance and economics.The nominal…

6. The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on savings accounts is 12% 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. Time Period Before increase in MS. Immediately after increase in MS Nominal Interest Rate (Percent) 12 12 Expected Inflation (Percent) 5 The unanticipated change in inflation arbitrarily benefits Actual Inflation (Percent) S 10 Expected Real Interest Rate (Percent) Actual 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 5% 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), Now consider the long-run impact of the change in money growth and inflation. According to the Fisher effect, as expectations adjust higher inflation rate, the nominal interest rate will to % per year. the new,