The unaticipated change in inflation arbitrarily benefits borrowers or lenders ?

Question

The unaticipated change in inflation arbitrarily benefits borrowers or lenders?

...The nominal interest rate will rise or fall?

Suppose the nominal interest rate on car loans is 11% per year, and both actual and expected inflation are equal to 496 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. Time Period Before increase in MS Immediately after increase in MS Nominal Interest Rate (Percent) Expected Inflation (Percent) 4 4 Actual Inflation (Percent) 4 Expected Real Interest Rate (Percent) Actual Real Interest Rate (Percent) 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

Explanation / Answer

Before increase in MS-

To get real interest rates subtarct the expected inflation percentage from your nominal interest rate.

But if expected inflation rate increased to 6% then, RI= EIR-NI i.e, RI= 6%-11%= -5%. so, it falls.

Actual real interest rate= actual inflation rate - nominal interest rate. -5%

After increase in MS-

real interest rate= EIR-NI= 6%-11%= -5%

actual interest rate= AIR-NI=5%

before the real interest rate was 7% with EIR-NI= 4%-11%= 7%

so, in long run it will decrease by 2% every year with increase in inflation rate.

the unanticiapted change in inflation does not benefit borrower or lender as it will increase the interest rates.

nominal interest rate should fall and banks will be harmed by anticipated inflation as people will make less savings and will spend more.

THE unanticiated change in inflation arbrituarly benefits banks.

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