Lecture 2 - Econ Notes-Lecture 2 1/29/08 Inverted Interest...

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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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