# ch4c - Money and inflation What we learned so far in the...

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slide 0 Money and inflation What we learned so far: in the long run, there is a one-for-one relationship between money growth and inflation. Next we will show that this implies a direct relationship between inflation and the interest rate. CHAPTER 4 Money and Inflation

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slide 1 CHAPTER 4 Money and Inflation Inflation and interest rates Nominal interest rate, i not adjusted for inflation Real interest rate, r adjusted for inflation: r = i - π
slide 2 CHAPTER 4 Money and Inflation The Fisher effect The Fisher equation: i = r + π Chap 3: S = I determines r . Hence, an increase in causes an equal increase in i . This one-for-one relationship is called the Fisher effect .

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slide 3 CHAPTER 4 Money and Inflation Inflation and nominal interest rates in the U.S., 1955-2006 percent per year -5 0 5 10 15 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 inflation rate nominal interest rate
slide 4 CHAPTER 4 Money and Inflation Inflation and nominal interest rates across countries Switzerland Germany Brazil Romania Zimbabwe Bulgaria U.S. Israel

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slide 5 CHAPTER 4 Money and Inflation Exercise: Suppose V is constant, M is growing 5% per year, Y is growing 2% per year, and r = 4%. a. Solve for
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ch4c - Money and inflation What we learned so far in the...

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