10H6 - Econ. 102. Homework 6. Due: April 12, 2010. No late...

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Econ. 102. Homework 6. Due: April 12, 2010. No late answer. *******. 1. Show your derivation and calculation explicitly. 2. Use the ruler to draw graphs. (Also show the scale explicitly). 3. E-mail submission of your answer will not be accepted. 4. Do not copy someone else’s answer. ******. 1. The real interest rate (r) is equal to the nominal interest rate (i) minus the inflation rate ( π ) or (1) r = i - π , where π = P/P The Fisher equation is obtained by rearranging the preceding equation to obtain (2) i = r + π Assume that the growth rate of RGDP (Y) = 3% and velocity is constant, the quantity of money equation implies that (3) % change in P = % change in M - % change in Y or π = M/M - Y/Y If Y/Y =3%, it is easy to see that an increase in M/M of 4% causes a 1 % increase in π . According to the Fisher equation, this 1% increase in inflation rate ( π ) causes a 1% increase in i because the real interest rate (r) is presumed to be affected by real variables only. a.
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This note was uploaded on 09/08/2010 for the course ECON 102 at San Jose State.

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10H6 - Econ. 102. Homework 6. Due: April 12, 2010. No late...

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