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.
Email 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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 '10
 Shieh,YeungNan
 Inflation, Interest Rates, Fisher equation, new equilibrium NX

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