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,

2. (40 points) In their 1999 Applied Economics Letters paper, Zakir and Wunnava proposed the following specification in identifying the factors affecting infant mortality rates (IMR): IMR₁ = B₁+ B₁FERTILITY, + ß₂LNGNP; +߸LABOUR; + ßLABOUR² + B₂LITERACY, + BHEALTH; +ε₁ Where i=1,2,..., 117 (i.e., based on a cross-section of 117 countries) IMR = infant mortality rate-number of deaths before age 1 per 1000 live births FERTILITY = number of births per woman LNGNP = the natural logarithm of per capita GNP (note that GNP is measured in '000 of $s) LABOUR = percentage of women in the labor force LITERACY = female literacy rate HEALTH = expenditure on health care as percentage of GNP Following are their estimated regression results along with sample means (based on a cross-section of industrialized and third world countries for 1993). Mean of IMR: 44.983 Variable name Estimated t-ratio Mean coefficient FERTILITY 10.812 7.848 3.5556 LNGNP -6.998 -3.134 8.2585 LABOUR 4.135 3.359 40.051 LABOUR²…

Which of the following is counted in the GNP of the United States? A) the value of services that are produced by state and local governments in the United States B) the profit earned by a restaurant located in the United States but owned by a Guatemalan company C) the wage of a foreign citizen who works in the United States for a U.S. firm D) the interest earned by a Brazilian bank on loans to a business firm located in the United States

Gg.220.