Money Growth and Inflation Suppose the nominal interest rate on car loans is 8% per year. If borrowers and lenders expect an inflation rate of 5% per year, the expected real interest rate is per year. Suppose the Bank of Canada unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 5% to 7% per year. In the short run, the real interest rate on car loans will to per year. The unanticipated change in inflation arbitrarily harms . 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.
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Money Growth and Inflation Suppose the nominal interest rate on car loans is 8% per year. If borrowe...
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