eco202_note10 - Macroeconomics Theory and Policy...

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Macroeconomics Theory and Policy Masoud Anjomshoa 1 1 Expectations, Real and Nominal Interest Rates: . Nominal Interest Rate, i: Rate of return on assets, measured in terms of current dollar. Real Interest Rate, r: Rate of return on assets, measured in terms of a basket of goods and services. $1 Investment in terms of current dollar i t Year t Year t+1 1 unit of capital good Investment in terms of goods r t Masoud Anjomshoa 2 Real vs. Nominal Interest Rates: . Investment in terms of goods r t Year t Year t+1 P t $P t Investment in terms of current dollar i t P e t+1 ? 1 unit of capital good
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Macroeconomics Theory and Policy Masoud Anjomshoa 2 Masoud Anjomshoa 3 Fisher effect: By arbitrage , in equilibrium: Real vs. Nominal Interest Rates: . () e 1 t t t t P P i 1 r 1 + + = + () + + = + + t t e 1 t t t P P P 1 r 1 i 1 r t = ex-ante real interest rate r’ = ex-post real interest rate = realized real interest rate: r’ = i – π If π > π e Î r’ <
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This note was uploaded on 08/12/2010 for the course ECO 202 taught by Professor Anjomshoa during the Spring '08 term at University of Toronto- Toronto.

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eco202_note10 - Macroeconomics Theory and Policy...

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