PLEASE ONLY GIVE ANSWER, NO EXPLANATION. Have the answers with the question number and part like I provided, ex. 1a, 1b, 2a, 2b, etc. Please pay attention to each picture for questions 1-8.

1.

1. The level of prices and the value of money Suppose the price level reflects the number of dollars needed to buy a basket of goods containing one can of soda, one bag of chips, and one comic book. In year one, the basket costs $8.00. In year two, the price of the same basket is $7.00. From year one to year two, there is V at an annual rate of V . In year one, $40.00 will buy V baskets, and in year two, $40.00 will buy V baskets. This example illustrates that, as the price level falls, the value of money V . 1. The level of prices and the value of money Suppose the price level reflects the number of dollars needed to buy a basket of goods containing one can of soda, one bag of chips, and one comic book. In year one, the basket costs $8.00. In year two, the price of the same basket is $7.00. From year one to year two, there is V at an annual rate of V . In year one, $40.00 will buy V baskets, and in year two, $40.00 will buy V bask deflation This example illustrates that, as the price level falls, the value of money 1.00% Attempts I I Do No Harm / 3 1.25% 1. The level of prices and the value of money 1 43% Suppose the price level reflects the number of dollars needed to buy a basket of goods containing one can of soda, one bag 12_50% nd one comic book. In year one, the basket costs $8.00. 14.29% In year two, the price of the same basket is $7.00. From year one to year two, there is V at an annual rate of V . In year one, $40.00 will buy V baskets, and in year two, $40.00 will buy V baskets. This example illustrates that, as the price level falls, the value of money V . Attempts I I Do No Harm / 3 0.18 1. The level of prices and e of money 0.2 Suppose the price level refle umber of dollars needed to buy a basket of goods containing one can of soda, one bag of chips, and one comic 2.86 book. In year one, the baske 8.00. In year two, the price of the sket is $7.00. From year one to year two, there is V at an annual rate of V . 5.71 In year one, $40.00 will buy V baskets, and in year two, $40.00 will buy V baskets. This example illustrates that, as the price level falls, the value of money V . Attempts I I Do No Harm / 3 1. The level of prices and the value of money Suppose the price level reflects the number of dollars needed to buy a bask- ds containing one can of soda, one bag of chips, and one comic book. In year one, the basket costs $8.00. In year two, the price of the same basket is $7.00. From year one to year t is V at an annual rate of V . In year one, $40.00 will buy V baskets, and in year two, $40.00 will buy V baskets. This example illustrates that, as the price level falls, the value of money V . Attempts I I Do No Harm / 3 1. The level of prices and the value of money Suppose the price level reflects the number of dollars needed to buy a basket of goods containing one can of soda, one bag of chips, and one comic book. In year one, the basket costs $8.00. H 565 In year two, the price of the same basket is $7.00. From year one to ye V at an annual rate of V . falls In year one, $40.00 will buy V baskets, and in year two, $40.00 will remains the same This example illustrates that, as the price level falls, the value of money V . 2. Money supply, money demand, and adjustment to monetary equilibrium The following table shows a money demand schedule, which is the quantity of money demanded at various price levels (P). Fill in the Value of Money column in the following table. Quantity of Money Demanded Price Level (P) Value of Money (l/P) (Billions of dollars) 1.00 _V 2.0 1.33 _V 2.5 2.00 _V 4.0 4.00 _V 8.0 Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the V money the typical transaction requires, and the V money people will wish to hold in the form of currency or demand deposits. 2. Money supply, money demand, and adjustment to monetary equilibrium The following table shows a money demand schedule, which is the quantity of money demanded at various price levels (P). Fill in the Value of Money column in the following table. Quantity of Money Demanded Price Level (P) Value of Money (l/P) (Billions of dollars) 1.00 _V _ 2.0 1.33 2.5 2.00 4.0 4.00 8.0 Now consider the relationship n the price level and the quantity of money that people demand. The lower the price level, the Y money the typical transaction requires, and the V money people will wish to hold in the form of currency or demand deposits. 2. Money supply, money demand, and adjustment to monetary equilibrium The following table shows a money demand schedule, which is the quantity of money demanded at various price levels (P). Fill in the Value of Money column in the following table. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 1.00 _V 2.0 1.33 _V 2.5 2.00 4.0 4.00 8.0 Now consider the relationship I the price level and the quantity of money that people demand. The lower the price level, the Y money the typical transaction requires, a money people will wish to hold in the form of currency or demand deposits. 2. Money supply, money demand, and adjustment to monetary equilibrium The following table shows a money demand schedule, which is the quantity of money demanded at various price levels (P). Fill in the Value of Money column in the following table. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 1.00 _v 2.0 1.33 _v 2.5 2.00 _v 4.0 4.00 8.0 Now consider the relationship the price level and the quantity of money that people demand. The lower the price level, the V money the typical transaction requires, a money people will wish to hold in the form of currency or demand deposits. Assume that the Fed initially fi nuantity of money supplied at $2.5 billion. 2. Money supply, money demand, and adjustment to monetary equilibrium The following table shows a money demand schedule, which is the quantity of money demanded at various price levels (P). Fill in the Value of Money column in the following table. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 1.00 _V 2.0 1.33 _V 2.5 2.00 _V 4.0 4.00 _V 8.0 Now consider the relationship I the price level and the quantity of money that people demand. The lower the price level, the Y money the typical transaction requires, a money people will wish to hold in the form of currency or demand deposits. Assume that the Fed initially fi nuantity of money supplied at $2.5 billion. 2. Money supply, money demand, and adjustment to monetary equilibrium The following table shows a money demand schedule, which is the quantity of money demanded at various price levels (P). Fill in the Value of Money column in the following table. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 1.00 _V 2.0 1.33 _V 2.5 2.00 _V 4.0 4.00 _V 8.0 Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the Y money the typical transaction requires, and the V money people will wish to hold in the form of currency or demand deposits. - more Assume that the Fed initially fixes the quantity of money supplied at $2.5 billion. E 2. Money supply, money demand, and adjustment to monetary equilibrium The following table shows a money demand schedule, which is the quantity of money demanded at various price levels (P). Fill in the Value of Money column in the following table. Quantity of Money Demanded Price Level (P) Value of Money (1/P) (Billions of dollars) 1.00 _V 2.0 1.33 _V 2.5 2.00 _V 4.0 4.00 _V 8.0 Now consider the relationship between the price level and the quantity of money that people demand. The lower the price level, the Y money the typical transaction requires, and the V money people will wish to hold in the form of currency or demand deposits. Assume that the Fed initially fixes th y of money supplied at $2.5 billion. Assume that the Fed initially fixes the quantity of money supplied at $2.5 billion. Use the orange line (square symbol) to plot the initial money supply (MS, ) set by the Fed. Then, referring to the previous table, use the blue connected points (circle symbol) to graph the money demand curve. 1.25 1.00 MS O 0.75 Money Demand VALUE OF MONEY 0.50 MS 2 0.25 1 2 3 4 5 6 7 8 QUANTITY OF MONEY (Billions of dollars)According to your graph, the equilibrium value of money is Y , therefore the equilibrium price level is V . Now, suppose that the Fed increases the money supply from the initial level of $2.5 billion to $4 billion. In order to increase the money supply, the Fed can use open market operations to v the public. Use the purple line (diamond symbol) to plot the new money supply (MSz). Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is V than the quantity of money demanded at the initial equilibrium. This expansion in the money supply will V people's demand for goods and services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will v and the value of money will V According to your graph, the equilibrium value of money is Y , therefore the equilibrium price level is V . Now, suppose that the Fed increases the money supply fro tial level of $2.5 billion to $4 billion. In order to increase the money supply, the Fed can use op -t operations to v the public. Use the purple line (diamond symbol) to plot the new man. (MSz). Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is V than the quantity of money demanded at the initial equilibrium. This expansion in the money supply will V people's demand for goods and services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will v and the value of money will V According to your graph, the equilibrium value of money is Y , therefore the equilibrium price level is V . Now, suppose that the Fed increases the money supply from the initial level of $2.5 billion to $4 billion. In order to increase the money supply, the Fed can use open market operations to v Use the purple line (diamond symbol) to plot the new money supply (MSz). Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is V than the quantity of money demanded at the initial equilibrium. This expansion in the money supply will V people's demand for goods and services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will v and the value of money will V According to your graph, the equilibrium value of money is Y , therefore the equilibrium price level is V . Now, suppose that the Fed increases the money supply from the initial level of $2.5 billion to $4 billion. In order to increase the money supply, the Fed can use open market operations to v the public. sell bonds to Use the purple line (diamond symbol) to plot the new money supply (MSz). buy bonds from Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is V than the quantity of money demanded at the initial equilibrium. This expansion in the money supply will V people's demand for goods and services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will v and the value of money will V According to your graph, the equilibrium value of money is Y , therefore the equilibrium price level is V . Now, suppose that the Fed increases the money supply from the initial level of $2.5 billion to $4 billion. In order to increase the money supply, the Fed can use open market operations to v the public. Use the purple line (diamond symbol) to plot the new money supply (MSz). Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is V than the quantity of money demanded at the initial equilibrium. This expansion in the money supply will V people's d goods and services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of good es will v and the value of money will V . E According to your graph, the equilibrium value of money is Y , therefore the equilibrium price level is V . Now, suppose that the Fed increases the money supply from the initial level of $2.5 billion to $4 billion. In order to increase the money supply, the Fed can use open market operations to v the public. Use the purple line (diamond symbol) to plot the new money supply (MSz). increase reduce Immediately after the Fed changes the money supply from its initial equilibrium level, the quan -y supplied is V than the quantity of money demanded at the initial equilibrium. This expansion in the money supply will V people's demand for goods and services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will v and the value of money will V According to your graph, the equilibrium value of money is Y , therefore the equilibrium price level is V . Now, suppose that the Fed increases the money supply from the initial level of $2.5 billion to $4 billion. In order to increase the money supply, the Fed can use open market operations to v the public. Use the purple line (diamond symbol) to plot the new money supply (MSz). Immediately after the Fed changes the money supply from its initial equilibrium level, the quantity of money supplied is V tha quantity of money demanded at the initial equilibrium. This expansion in the money supply will V people's demand for goods . services. In the long run, since the economy's ability to produce goods and services has not changed, the prices of goods and services will v and the value of money will V According to your graph, the equilibrium value of money is Y , therefore the equilibrium price level is V . Now, suppose that the Fed increases the money supply from the initial level of $2.5 billion to $4 billion. In order to increase the money supply, the Fed can use open market operations to v the public. Use the purple line (diamond symbol) to plot the new money supply (MSz). Immediately after the F _es the money supply from its initial equilibrium level, the quantity of money supplied is V than the quantity of money dem. the initial equilibrium. This expansion in the money supply will V people's demand for goods and services. In the long ru he economy's ability to produce goods and services has not changed, the prices of goods and services will v and the value of money will V 3. The classical dichotomy and the neutrality of money The classical dichotomy is the separation of real and nominal variables. The following questions test your understanding of this distinction. Juanita spends all of her money on comic books and beignets. In 2015, she earned $27.00 per hour, the price of a comic book was $9.00, and the price of a beignet was $3.00. Which of the following give the nominal value of a variable? Check all that apply. The price of a beignet is $3.00 in 2015. The price of a beignet is 0.33 comic books in 2015. O Juanita's wage is 3 comic books per hour in 2015. Which of the following give the real value of a variable? Check all that apply. The price of a comic book is 3 beignets in 2015. The price of a comic book is $9.00 in 2015. O Juanita's wage is $27.00 per hour in 2015.Suppose that the Fed sharply increases the money supply between 2015 and 2020. In 2020, Juanita's wage has risen to $54.00 per hour. The price of a comic book is $18.00 and the price of a beignet is $6.00. In 2020, the relative price of a comic book is V . Between 2015 and 2020, the nominal value of Juanita's wage V , and the real value of her wage V . Monetary neutrality is the proposition that a change in the money supply V nominal variables and V real variables. L] The price of a comic book is $9.00 '- 0.33 beignets C] Juanita's wage is $27.00 per houri 3 beignets Suppose that the Fed sharply increases the $6.00 een 2015 and 2020. In 2020, Juanita's wage has risen to $54.00 per hour. The price of a comic book is $18.00 and the price of a bei $18.00 In 2020, the relative price of a comic book is V . Between 2015 and 2020, the nominal value of Juanita's wage v , and the real value of her wage v . Monetary neutrality is the proposition that a change in the money supply V nominal variables and V real variables. L] The price ofa comic book is $9.00 in 2015. C] Juanita's wage is $27.00 per hour in 2015. Suppose that the Fed sharply increases the money supply bet In 2020, Juanita's wage has risen to $54.00 per hour. The price of decreases a comic book is $18.00 and the price of a beignet is $6.00. increases In 2020, the relative price of a comic book is remains the same Between 2015 and 2020, the nominal value of Juanita's wage V , and the real value of her wage V . Monetary neutrality is the proposition that a change in the money supply V nominal variables and V real variables. L] The price ofa comic book is $9.00 in 2015. C] Juanita's wage is $27.00 per hour in 2015. Suppose that the Fed sharply increases the money supply between 2015 and 2020. In 2020, Juanita's wage has risen t- - price of increases a comic book is $18.00 and the price of a beignet is $6.00. decreases In 2020, the relative price of a comic book is Y . remains the same Between 2015 and 2020, the nominal value of Juanita's wage V , and the real value of her wage V . Monetary neutrality is the proposition that a change in the money supply V nominal variables and V real variables. L] The price ofa comic book is $9.00 in 2015. C] Juanita's wage is $27.00 per hour in 2015. Suppose that the Fed sharply increases the money supply between 2015 and 2020. In 2020, Juanita's wage has risen to $54.00 per hour. The price of a comic book is $18.00 and the price of a beignet is $6.00. In 2020, the relative price of a comic book is Y . does not affect affects Between 2015 and 2020, the nominal value of Juanita's wage - d the real value of her wage V . Monetary neutrality is the proposition that a change in the money supply V nominal variables and V real variables. L] The price ofa comic book is $9.00 in 2015. C] Juanita's wage is $27.00 per hour in 2015. Suppose that the Fed sharply increases the money supply between 2015 and 2020. In 2020, Juanita's wage has risen to $54.00 per hour. The price of a comic book is $18.00 and the price of a beignet is $6.00. In 2020, the relative price of a comic book is Y . does not affect affects Between 2015 and 2020, the nominal value of Juanita's wage V , and the real value of her wag - V Monetary neutrality is the proposition that a change in the money supply V nominal variables and V real variables. 4. Velocity and the quantity equation Consider a simple economy that produces only pens. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2017, the money supply was $320, the price of a pen was $8.00, and the economy produced 600 pens. Fill in the missing values in the following table, selecting the answers closest to the values you calculate. Quantity of Money Price Level Quantity of Output Nominal GDP Year (Dollars) Velocity of Money (Dollars) (Pens) (Dollars) 2017 320 8.00 600 V 2018 336 15 _Y 600 V The money supply grew at a rate of V from 2017 to 2018. Since pen output did not change from 2017 to 2018 and the velocity of money Y , the change in the money supply was reflected V in changes in the price level. The inflation rate from 2017 to 2018 was V . 4. Velocity and the quantity equation Consider a simple economy that produces only pens. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2017, the money supply was $320, the price of a pen was $8.00, and the economy produced 600 pens. 71.00 75.00 Fill in the missing values in the following table, selecting the answers closest to the values you c 4,800.00 Quantity of Money Price Level Quantity of Output 5,040-00 P Year (Dollars) Velocity of Money (Dollars) (Pens) ' 2017 320 8.00 600 V 2018 336 15 _V 600 V The money supply grew at a rate of V from 2017 to 2018. Since pen output did not change from 2017 to 2018 and the velocity of money Y , the change in the money supply was reflected V in changes in the price level. The ination rate from 2017 to 2018 was V . 4. Velocity and the quantity equation Consider a simple economy that produces only pens. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2017, the money supply was $320, the price of a pen was $8.00, and the economy produced 600 pens. Fill in the missing values in the following table, selecting the . closest to the values you calculate. Quantity of Money Pri Quantity of Output Nominal GDP Year (Dollars) Velocity of Money ( D (Pens) (Dollars) 2017 320 600 V 2018 336 15 _V 600 V The money supply grew at a rate of V from 2017 to 2018. Since pen output did not change from 2017 to 2018 and the velocity of money Y , the change in the money supply was reflected V in changes in the price level. The ination rate from 2017 to 2018 was V . 4. Velocity and the quantity equation Consider a simple economy that produces only pens. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2017, the money supply was $320, the price of a pen was $8.00, and the economy produced 600 pens. 71.00 Fill in the missing values in the following table, selecting the answers closest to the values you c 7500 Quantity of Money Price Level Quantity of Output 430030 P Year (Dollars) Velocity of Money (Dollars) (Pens) 5,040.00 2017 320 8.00 600 2018 336 15 Y 600 V The money supply grew at a rate of V from 2017 to 2018. Since pen output did not change from 2017 to 2018 and the velocity of money Y , the change in the money supply was reflected V in changes in the price level. The ination rate from 2017 to 2018 was V . 4. Velocity and the quantity equation Consider a simple economy that produces only pens. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2017, the money supply was $320, the price of a pen was $8.00, and the economy produced 600 pens. Fill in the missing values in the fol/o , selecting the answers closest to the values you calculate. Quantity of Money Price Level Quantity of Output Nominal GDP Year (Dollars) V Money (Dollars) (Pens) (Dollars) 2017 320 8.00 600 V 2018 336 Y 600 V The money supply grew at a rate of V from 2017 to 2018. Since pen output did not change from 2017 to 2018 and the velocity of money Y , the change in the money supply was reflected V in changes in the price level. The ination rate from 2017 to 2018 was V . 4. Velocity and the quantity equation Consider a simple economy that produces only pens. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2017, the money supply was $320, the price of a pen was $8.00, and the economy produced 600 pens. Fill in the missing values in the following table, selecting the answers closest to the values you calculate. Quantity of Money Price Level Quantity of Output Nominal GDP ) Velocity of Money (Dollars) (Pens) (Dollars) increased 8.00 600 V decreased 15 V 500 V remained the same at a rate of V from 2017 to 2018. Since pen output did not change from 2017 to 2018 and the velocity of money Y , the change in the money supply was reflected V in changes in the price level. The ination rate from 2017 to 2018 was V . 4. Velocity and the quantity equation Consider a simple economy that produces only pens. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2017, the money supply was $320, the price of a pen was $8.00, and the economy produced 600 pens. Fill in the missing values in the following table, selecting the answers closest to the values you calculate. Quantity of Money Price Level Quantity of Output Nominal GDP Year (Dollars) Velocity of Money (Dollars) (Pens) (Dollars) 2017 320 8.00 600 V 2018 336 15 Y partially V The money supply grew at a rate of V from 2017 to 2018. Since did not change from 2017 to 2018 and the velocity of money Y , the change in the money supply was reflected V in changes in the price level. The ination rate from 2017 to 2018 was V . 4. Velocity and the quantity equation Consider a simple economy that produces only pens. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2017, the money supply was $320, the price of a pen was $8.00, and the economy produced 600 pens. Fill in the missing values in the following table, selecting the answers closest to the values you calculate. Quantity of Money Price Level Quantity of Output Nominal GDP Iars) Velocity of Money (Dollars) (Pens) (Dollars) 20 8.00 600 V 36 15 Y 600 V rew at a rate of V from 2017 to 2018. Since pen output did not change from 2017 to 2018 and the velocity of money Y , the change in the money supply was reflected V in changes in the price level. The ination rate from 2017 to 5. Using money creation to pay for government spending Consider Kharkeez, a hypothetical country that produces only burritos. In 2016, a burrito is priced at $4.00. Complete the first row of the table with the quantity of burritos that can be bought with $900. Hint: In this problem, assume it is not possible to buy a fraction of a burrito, and always round down to the nearest whole burrito. For example, if your calculations result in 1.5 burritos, the answer should be 1 burrito. Price of a Burrito Burritos Bought with $900 Year (Dollars) (Quantity) 2015 4.00 |:| Suppose the government of Kharkeez cannot raise sufficient tax revenue to pay its debts. In order to meet its debt obligations, the government prints money. As a result, the money supply rises by 20% by 2017. Assuming monetary neutrality holds, complete the second row of the table with the new price of a burrito and the new quantity of burritos that can be bought with $900 in 2017. The impact of the government's decision to raise revenue by printing money on the value of money is known as the Y . 5. Using money creation to pay for government spending Consider Kharkeez, a hypothetical country that produces only burritos. In 2016, a burrito is priced at $4.00. Complete the first row of the table with the quantity of burritos that can be bought with $900. Hint: In this problem, assume it is not possible to buy a fraction of a burrito, and always round down to the nearest whole burrito. For example, if your calculations result in 1.5 burritos, the answer should be 1 burrito. Price of a Burrito Burritos Bought with $900 Year (Dollars) (Quantity) 2015 4.00 |:| Suppose the government of Kharkeez cannot raise sufficient tax revenue to pay its debts. In order to meet its debt i ment prints money. As a result, the money supply rises by 20% by 2017. Fisher effect velocity of money Assuming monetary neutrality holds, complete the second row of the table with the new price of a burrito and the n classical dichotomy that can be bought with $900 in 2017. inflation tax The impact of the government's decision to raise revenue by printing money on the value of money is known as the v . 6. The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on car loans is 9% per year, and both actual and expected inflation are equal to 3%. Complete the first row of the table by lling 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 |:| |:| Immediately after increase 9 3 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 yean Complete the second row of the table by lling in the expected and actual real interest rates on car loans immediately after the increase in the money supply (MS). The unanticipated change in inflation arbitrarily harms V . 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 V to l:] per year. 6. The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on car loans is 9% per year, and both actual and expected inflation are equal to 3%. Complete the first row of the table by lling 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 |:| |:| Immediately after increase 9 3 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 yean Complete the second row of the table by lling in the expected and actual real interest rates on car loans immediately after the increase in the money supply (MS). The unanticipated change in inflation arbitrarily harms V . nd inflation. According to the Fisher effect, as expectations adjust to the new, lenders - per year. Now consider the long-run impact of the change in mo higher inflation rate, the nominal interest rate will V 6. The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on car loans is 9% per year, and both actual and expected inflation are equal to 3%. Complete the first row of the table by lling 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 |:| |:| Immediately after increase 9 3 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 yean Complete the second row of the table by lling in the expected and actual real interest rates on car loans immediately after the increase in the money supply (MS). The unanticipated change in inflation arbitrarily h Now consider the long-run impact of the change i . growth and inflation. According to the Fisher effect, as expectations adjust to the new, higher inflation rate, the nominal interest rate will _V _ to l:] per year. 7. Identifying costs of inflation Eric manages a grocery store in a country experiencing a high rate of inflation. To keep up with inflation, he spends a lot of time every day updating the prices, printing new price tags, and sending out newspaper inserts advertising the new prices. His employees regularly deal with customer annoyance over the frequent price changes. This is an example of the V of inflation. menu COStS 7. Identifying costs of inflation shoeleather costs Eric manages a grocery store in a country experiencing a high rate of inflation, he spends a lot of time every day updating unit-ofaccount costs the prices, printing new price tags, and sending out newspaper insert- es. His employees regularly deal with customer annoyance over the frequent price changes. This is an example of the v of inflation. 8. Inflation-induced tax distortions Felix receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a lowinflation scenario and a high inflation scenario. Given the real interest rate of 4.5% per year, nd the nominal interest rate on Felix's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each ination scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) decrease Compared with lower inflation rates, a higher inflation rate will v the aftertax real interest rate when the government taxes nominal interest income. This tends to V saving, thereby V the quantity of investment in the economy and Y the economy's longrun growth rate. 8. Inflation-induced tax distortions Felix receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a lowinflation scenario and a high inflation scenario. Given the real interest rate of 4.5% per year, nd the nominal interest rate on Felix's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each ination scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) _ l:l encourage - C |:' discourage nominal interest income. This tends to V saving, thereby V the quantity of investment in the economy and 2.0 4.5 9.5 4.5 Compared with lower inflation rates, a rate will v the aftertax real interest rate when the government taxes Y the economy's longrun growth rate. 8. Inflation-induced tax distortions Felix receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a lowinflation scenario and a high inflation scenario. Given the real interest rate of 4.5% per year, nd the nominal interest rate on Felix's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each ination scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) :1 |:] :l |:| 2.0 4.5 9.5 4.5 decreasing increasing Compared with lower inflation rates, a higher inflation rate will tax real interest rate when the government taxes nominal interest income. This tends to V saving, thereby V the quantity of investment in the economy and Y the economy's longrun growth rate. 8. Inflation-induced tax distortions Felix receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 4.5% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate. The government taxes nominal interest income at a rate of 10%. The following table shows two scenarios: a lowinflation scenario and a high inflation scenario. Given the real interest rate of 4.5% per year, nd the nominal interest rate on Felix's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each ination scenario. Inflation Rate Real Interest Rate Nominal Interest Rate After-Tax Nominal Interest Rate After-Tax Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) 9.5 4.5 |:' . lower inflation rates, a higher inflation rate will v the aftertax real interest rate when the government taxes est income. This tends to V saving, thereby V the quantity of investment in the economy and Y the economy's longrun growth rate