31Chp5-Econ3310 - Bond Market Equilibrium Interest Rates...

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Unformatted text preview: Bond Market Equilibrium Interest Rates Market for Money: LPF Equilibrium Interest Rates in LPF If we look at changes in money growth, than Fisher effect is permanent. Fisher effect persists only as long as the price level continues to rise. A rising price level will raise interest rates because people will expect inflation to be higher over the course of the year. When the price level stops rising, expectations of inflation will return to zero. Price-level effect remains even after prices have stopped rising. A one time increase in the money supply will cause prices to rise to a permanently higher level by the end of the year. The interest rate will rise via the increased prices. Price-Level Effect and Fisher Effect Asset Demand ...
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