Econ Notes-Lecture 2 1/29/08 Inverted Interest Rates and Recessions • Interest rate = the cost of using future income (Y)…? • Real interest rate (r) = Fisher Equation = Nominal interest rates = current $ interest rate. The real interest rate + inﬂation (growth rate in general price level) • Price Level (P) = The ∆ P/P (P07-P06/P06) • r = i -( ∆ P/P)^E • GDP = gross domestic product = all good produced in the US (domestic) • Inverted = short term rates are higher than long term • Recession= the economy (GDP) is declining and we are producing less stuff. • When you see -( ∆ Y/Y). Notice the negative = a recession (the blue line on the graph) • Growth rate = (ex:) Y2007 - Y2006 / Y2006 = ∆ Y = ( ∆ Y/Y) • i = r + ( ∆ P/P)^Expectations Real Fed Fund • Fed funds - Core Consumer Price index (CPI = way to measure price) • Core = takes out food any energy prices • Red bars recession = -∆ Y/Y. High levels (green) lead to recession. Annual % Change in Economic Output
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