c) actual real wage is greater than the expected real wage: unemployment rises. please, I will be very grateful!!! 228. Question If the actual inflation rate is less than the expected inflation rate, then: Answer the lenders gain and the borrowers lose. We can subtract Equation 2 from Equation 1 to obtain r + τ e - r r - τ = 0 from whence 2. r r - r = τ e - τ A higher rate of inflation than expected lowers the realized real real interest rate below the contracted real interest rate. An example of such communication is the Federal Open Market Committee’s recently released long-run inflation forecasts. The real interest rate cannot be negative. The latter implies permanence. Which of the following is TRUE concerning interest rates? velocity real output, and prices. A higher rate of inflation than expected lowers the realized real real interest rate below the contracted real interest rate. presents the critical roles of money demand in regulating the level of prices. where τ is the actual rate of inflation that occurs during the term of the loan, and r r is the realized real interest rate. Relevance. In fact actual inflation is different from the expected one. Bondholders lose out. A lower rate of inflation than expected raises the realized real interest rate above the contracted real interest rate. above is the question here are the multiple choices: a) actual real wage is greater than the expected real wage: unemployment falls b) actual real wage is less than the expected real wage: unemployment falls c) actual real wage is greater than the expected real wage: unemployment rises d) actual real wage is less than the expected real wage: unemployment rises please, I will be very … Suppose the real interest rate is 2.1% and the nominal interest rate is 5.4%. Graph sowing Inflation higher than wage growth 2010-2015 (falling real wages) 10. British inflation rose last month by less than the Bank of England and investors had expected, but still hit its highest level this year, pushed up by a rise in energy bills. Return to Lesson velocity real output, and prices. First, a central bank should take appropriate actions to stem the emergence of substantial slack in the economy and thereby reduce the risk of deflation. 231. 230. Now, if the inflation level has risen to 6%. When Inflation Is Higher, Firms Will Change Their Prices More Frequently. Question: The Ex-post Real Interest Rate Will Be Higher Than The Ex-rate Real Interest Rate When The: (a) Actual Rate Of Inflation Is Greater Than The Expected Rate Of Inflation (b) Actual Rate Of Inflation Is Less Than The Expected Rate Of Inflation (c) Rate Of Inflation Is Decreasing (d) Rate Of Inflation Is Increasing will have earned a larger rate of return than expected. The second impact of inflation is less obvious, but it can eventually take a major bite out of your portfolio returns. Several others, however, anticipated that longer-run inflation expectations would remain well anchored, supported in part by the Federal Reserve’s aggressive expansion of its balance sheet and the resulting growth of the monetary base, and therefore thought it unlikely that inflation would decline below levels they saw as consistent with the dual goals of price stability and maximum employment. If, in the long run, real GDP returns to its potential level, then in the long run . The opposite effects occur if inflation is lower than expected: the borrower loses, and the lender wins. If actual inflation is substantially less than this target, the Fed would be expected to ease policy accordingly. But I doubt it would be easy – how could a new target be credible if the Fed abandons the current target? derives the optimal quantity of inflation. If, in the long run, real GDP returns to its potential level, then in the long run. The unemployment rate will fall. Real wages will rise. Inflation Risk is also known as Purchasing Power Risk. However, workers eventually realize that inflation has grown faster than expected, their nominal wages have not kept pace, and their real wages have been diminished. Question: 1-)If Inflation Is Less Than Expected, Wealth Is Redistributed To _____. If the actual rate of inflation is less than the rate expected during a period, a. borrowers benefited at the expense of lenders. It means that the inflationary gap is more or less than expected.The FED will adjust the fund rate. For example, if the price of a television increases from $1,500 to $1,600 due to inflation, the lender makes more money because 10% interest on $1,600 is more than 10% interest on $1,500. Expected Inflation vs. Actual Inflation If actual inflation is greater than expected inflation, the actual real wage is less than the expected real wage, and the unemployment rate falls. Therefore they bought government bonds with interest rates of around 6%. It is mandatory to procure user consent prior to running these cookies on your website. Question 2 When actual inflation is less than expected inflation, Oborrowers and lenders both lose. b) actual real wage is less than the expected real wage: unemployment falls. 1 decade ago. This flows from the fact that the Fed Funds rates is at zero, therefore further decrease in the real rate can only be achieved by boosting inflation expectations. Anonymous. a fixed interest rate of 8% with 1% inflation, a fixed interest rate of 11% with 5% inflation, a fixed interest rate of 12% with 7% inflation, a fixed interest rate of 19% with 15% inflation. Unexpected Inflation A situation in which the inflation rate is higher than economists, regulators or others anticipated. Had that situation continued, the Fed would have been accommodating increased inflation expectations, thereby threatening their perceived commitment to low and stable inflation. B) greater than; fall C) less than; rise D) less than; fall Answer: A 16) The key to understanding the short-run trade-off behind the Phillips curve is that an increase in inflation will decrease unemployment if the inflation is _____ by both workers and firms. As I have argued, policymakers understand this risk, and are vociferously reiterating their independence. the borrowers gain and the lenders lose. Your email address will not be published. If the bank charges 8% and the inflation rate is more than 3%, then the bank. 8. Expected inflation = 5% Actual inflation = 2% Actual inflation = 8% $31.50 100 $30.88 102 $31.50 × = 100 $29.17 108 $31.50 100 $30 × = 105 $31.50 × = Table 17.2 The Basis for the Short-Run Phillips Curve If . Not in the minutes from the previous meeting, where they clearly define their expectations for inflation under appropriate monetary policy: It would appear that the Fed is attempting to anchor inflationary expectations in a range consistent with conventional understanding of the Fed’s implicit inflation target of 1.7-2% (note that this implied the Fed see a floor on the real rate of -2%). 17 - Suppose that changes in bank regulations expand... Ch. Course Hero, Inc. 67. This too helps keep expectations in check. 4)the consumer to government. the Phillips curve is vertical. There is some risk of suboptimal inflation rates, and therefore they will conduct policy conducive to raising inflation. True False Question 2 (1 point) The quantity theory of money: describes the general relationship between money. Is there any sense that the Fed is actually trying to change the expectations of their policy goals? Favorite Answer. 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