3 real and nominal interest rates the real interest

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Unformatted text preview: 13 8/4/11 The Quantity Theory for Inflation •  We can express the quantity equation in terms of growth rates. •  Using g as growth rate Constant = 0 Rate of inflation, represented as π •  Thus: Rate of inflation Growth rate in money Growth rate in GDP •  Quantity Theory of Money –  Changes in the growth rate of money lead one-for-one to changes in the inflation rate. –  Empirically, this holds up both in U.S. and worldwide data. •  Deflation –  Occurs when inflation rates are negative 14 8/4/11 Revisiting the Classical Dichotomy •  When all prices in the economy double, relative prices are unchanged (red money, blue money). •  When the relative prices of goods are unchanged, nothing real is affected. •  The neutrality of money says that changes in the money supply –  Have no real effects on the economy –  Only affect prices •  Empirically –  Holds in the long run –  Does not hold in the short run •  prices do not respond immediately to changes in the money supply 8.3 Real and Nominal Interest Rates •  The real interest rate –  Adjusts to bring about equilibrium between supply and demand for loanable funds in capital markets (Savings=Investment) –  Is equal to the marginal product of capital (Why?) –  Is paid in goods •  The nominal interest rate –  Is the interest rate on a savings account –  Is paid in dollars 15...
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This note was uploaded on 04/13/2012 for the course ECON 2102 taught by Professor ... during the Three '10 term at University of New South Wales.

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