Suppose the nominal interest rate on car loans is $13\%$ per year, and both actual and expected inflation are equal to $4\%.$

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.

Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from $4\%$ to $6\%$ per

year.

Complete the second row of the table by filling 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 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

per year.