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The Fisher effect and the cost of unexpected inflation

Suppose the nominal interest rate on savings accounts is 9% per year, and both actual and expected inflation are equal to 3%.

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.

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 Actual Expected Real Interest Actual Real Interest Rate Inflation Inflation Rate Rate Time Period (Percent) (Percent) (Percent) (Percent) (Percent) Before increase in MS 9 3 3 6 6 Immediately after increase W 6 6 6 in MS Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 3% to 6% 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 harms depositors 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 to 12% per year