Suppose the nominal interest rate on savings accounts is 12% per year, and both actual and expected inflation are equal to 7%. 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 Expected Time Period Rate (Percent) Inflation (Percent) Actual Inflation (Percent) Expected Real Interest Rate (Percent) Actual Real Interest Rate (Percent) Before increase in MS 12 7 7 Immediately after increase 12 7 10 in MS Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 7% 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). 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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Chapter1: Making Economics Decisions
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Suppose the nominal interest rate on savings accounts is 12% per year, and both actual and expected inflation are equal to 7%.
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
Expected
Time Period
Rate
(Percent)
Inflation
(Percent)
Actual
Inflation
(Percent)
Expected Real Interest
Rate
(Percent)
Actual Real Interest
Rate
(Percent)
Before increase in MS
12
7
7
Immediately after increase
12
7
10
in MS
Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 7% 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).
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.
Transcribed Image Text:Suppose the nominal interest rate on savings accounts is 12% per year, and both actual and expected inflation are equal to 7%. 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 Expected Time Period Rate (Percent) Inflation (Percent) Actual Inflation (Percent) Expected Real Interest Rate (Percent) Actual Real Interest Rate (Percent) Before increase in MS 12 7 7 Immediately after increase 12 7 10 in MS Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 7% 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). 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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