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Unformatted text preview: Barro Ch.11 PP 36 3. Inflation and Interest Rates Nominal interest rate (i) gives the growth in the dollars created by an asset over time. dollar value in year 2 = dollar value in year 1(1 + i) Real interest rate (r) gives the growth in the purchasing power of an Real value of asset in year 2 = dollar value in year 2/ = (dollar value in year 1 (1 + i))/ = real value of asset in year 1 (1 + i))/ = real value of asset in year 1 (1 + i))/ (/) = real value of asset in year 1 (1 + i))/ () We define 1 + r = (1 + r )( ) = 1 + i + r + r = 1 + i...
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This note was uploaded on 02/19/2011 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue UniversityWest Lafayette.
 Spring '08
 Blanchard
 Microeconomics, Inflation, Interest Rates

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