Suppose the nominal interest rate on savings accounts is 12% per year. If banks

Question

Suppose the nominal interest rate on savings accounts is 12% per year. If banks and depositors expect an inflation rate of 4% per year, the expected real interest rate is 8% per year. Suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation to rise unexpectedly from 4% to 7% per year. In the short run, the real interest rate on savings accounts will __________(rise or fall) to ________ per year. The unanticipated change in inflation arbitrarily harms _________(depositors or banks). 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 __________(rise or fall) to ________ per year.

Explanation / Answer

rise banks fall

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