Principles of Economics- Mankiw (5th) 619

Principles of Economics- Mankiw (5th) 619 - CHAPTER 28 M O...

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CHAPTER 28 MONEY GROWTH AND INFLATION 639 massive inflation. The inflation ends when the government institutes fiscal reforms—such as cuts in government spending—that eliminate the need for the inflation tax. THE FISHER EFFECT According to the principle of monetary neutrality, an increase in the rate of money growth raises the rate of inflation but does not affect any real variable. An impor- tant application of this principle concerns the effect of money on interest rates. In- terest rates are important variables for macroeconomists to understand because they link the economy of the present and the economy of the future through their effects on saving and investment. To understand the relationship between money, inflation, and interest rates, recall from Chapter 23 the distinction between the nominal interest rate and the real interest rate. The nominal interest rate is the interest rate you hear about at your bank. If you have a savings account, for instance, the nominal interest rate tells you
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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