Business, 03.03.2020 20:54, smann211

The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on car loans is 11% per year. If borrowers and lenders expect an inflation rate of 2% per year, the expected real interest rate is per year. Suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 2% to 6% per year. In the short run, the real interest rate on car loans will to 5% per year. 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 9% per year.

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The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on car loan...