Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Chapter 5, Problem 3QQ
To determine
The fisher effect.
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The two-year interest rate is 14.0% and the expected annual inflation rate is 7.0%.
a.What is the expected real interest rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
b-1. If the expected rate of inflation suddenly rises to 9.0%, what does Fisher’s theory say about how the real interest rate will change?
multiple choice
Real rate decreases
Real rate does not change
Real rate increases
b-2. If the expected rate of inflation suddenly rises to 9.0%, what will be the new nominal rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
At full employment, the expected inflation rate is
...
A. higher than the inflation rate
B. equal to the inflation rate
C. lower than the inflation rate
D. unknown
E. unrelated to the inflation rate
Expectations of inflation are ____________ effective than/as actual inflation in ____________ production costs.
a) less; increasing
b) less; decreasing
c) as; increasing
d) as; decreasing
e) more; increasing
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Similar questions
- The.... real interest rate will be greater than the .... real interest rate when the .... rate of inflation is ...... than the .... rate of inflation a) actual / expected / ex-post / greater / ex-ante b) ex-post / ex-ante / actual / less / expected c) ex-post / ex-ante / actual / greater / expected d) actual / expected / ex-post / less / ex-ante e) actual / expected / ex-post / more severe / ex-antearrow_forwardWhich of the following are likely consequences of rising inflation? Check all that apply. Savers wanting to save less and borrowers wanting to borrow more Savers wanting to save more and borrowers wanting to borrow less A misallocation of resources A distorted price-signaling mechanism Suppose the real interest rate (IR) is 3.5% and the inflation rate is 3.5%, and then the nominal or market interest rate is_______ . Crystal considers investing in the green energy industry and compares the following two options: 1. One-year bonds issued by Air Wizard, a producer of wind turbines based in the United States, that pay a nominal interest rate of 7% 2. One-year bonds issued by Sun Waters, a producer of solar water heaters based in Australia, that pay a nominal interest rate of 9.8% A thorough study has shown that the economic situation and prospects in the United States and Australia are very similar. Nevertheless, Crystal decides to…arrow_forwardSuppose individuals expected inflation in a given year to be around 3%, but it actually ended up being 10%. Given this information, we can assume that _____ benefited from this fact, since the real interest rate was _____ than the equilibrium rate A.lenders, higher B. lenders, lower C. borrowers, higher D. borrowers, lowerarrow_forward
- Negative real interest rates occur when the inflation rate is greater than the nominal interest rate. True or false? a. False b. Truearrow_forwardWhich of the following is true about the expected real interest rate? A) It is equal to the nominal interest rate plus the expected inflation rate. B) It is equal to the ratio of the nominal interest rate to the inflation rate. It increases as the price level increases. D) It is always positive. E It is negative if the expected inflation rate exceeds the nominal interest rate.arrow_forwardIf natural unemployment rate is 5%, nominal interest rate is 7%, inflation is constant at 3%. The central bank adopts an expansionary monetary policy to reduce unemployment rate to 3%. According to EAPC with adaptive inflation, if the inflation rises to 6%, the likely long run outcome of this policy would be a. Real interest rate 3%, natural unemployment rate 3% b. Nominal interest rate 10%, natural unemployment rate 5% c. Nominal interest rate 9%, natural unemployment rate 3% d. Real interest rate 1%, natural unemployment rate 5%arrow_forward
- According to the Fisher effect, the nominal interest rate will increase by 4% if the A. expected real interest rate increases by 4%. B. actual inflation rate exceeds the expected inflation rate by 4%. C. expected inflation rate increases by 4%. D. expected inflation rate decreases by 4%.arrow_forwardIf the inflation rate is positive, the price level in an economy is Select one: A. falling slowly. B. falling rapidly. C. constant. D. zero. E. rising.arrow_forward1) Whether you gain or lose during a period of inflation depends on: a) how the price increases affect government purchases of goods. b) whether the economy is expanding or contracting. c) whether you save or not. d) whether your income rises faster or slower than prices of the things you buy. 2) A real wage that does not keep pace with inflation implies: a) a decrease in purchasing power. b) a decrease in nominal wages. c) a decrease in nominal wages after inflation. d) an increase in the inflation adjusted real wage.arrow_forward
- Assuming prices and output are somewhat flexible, an increase in consumer spending will cause inflation to __________ in the short run and growth to ___________ in the short run. increase/decrease increase/increase decrease/increase decrease/decrease uncertain/decreasearrow_forwardWhich of the following are CORRECT statements regarding inflation and real variables? Select ONLY THOSE THAT APPLY. Select 2 correct answer(s) If nominal interest rate is 10 percent, the inflation rate is 5 percent, and the tax rate is 30 percent, the real after-tax interest rate is 2 percent. Lower than anticipated inflation raises the real wage rate (adjusted for inflation) and workers gain at the expense of employers who lose. If the money wage rate is $30.00 an hour and the price level is 120, the real wage rate is $24.00.arrow_forwardAn economy is at full employment. The quantity of money is growing at 8.3 percent a year, the nominal interest rate is 9.5 percent a year, real GDP is growing at 5.0 percent a year, and the inflation rate is 3.1 percent a year. What is the change in the velocity of circulation? Why might it be changing? The velocity of circulation is _______. A. increasing by 3.1 percent a year B. decreasing by 0.2 percent a year C. increasing by 0.2 percent a year D. constantarrow_forward
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