What is the Fisher Effect? Provide an example
What will be an ideal response?
All else equal, a rise in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer. Similarly, a fall in the expected inflation rate will eventually cause a fall in the interest rate.
Ex: If the expected U.S. inflation were to rise permanently from ? to ? + ??, current dollar interest rates R$ would eventually catch up to the higher inflation, rising by a value ?R$ = ?? in accordance with the Monetary Approach that in the long run purely monetary developments should have no effect on an economy's relative prices since the real rate of return on dollar assets would remain unchanged.
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Using cross-sectional data from the two Housing Assistance Supply Experiment (HASE) sites—Brown County, Wisconsin, and St
Joseph County, Indiana—John Mulford of Rand Research estimates the long-run "permanent" income elasticity of housing expenditures to be 0.45 for owners. Using this information, what is likely to happen to housing expenditures if the government increases income transfers to recipients in HASE sites? A) Housing expenditures will decrease by a small amount. B) Housing expenditures will increase significantly. C) Housing expenditures in HASE sites will fall significantly as recipients move out of these areas to higher-income areas. D) Housing expenditures will increase, but not significantly.
In a model with money neutrality, how much should the money supply be increased to obtain a 1% increase in real output?
A) -1% B) between 0 and 1% C) 1% D) It cannot be done.