Intermediate Macroeconomics Lecture 5 Inflation
Intermediate Macroeconomics Lecture 5 Inflation
Definition Inflation The overall increase in prices Hyperinflation: extraordinary high inflation
Definition Inflation: The overall increase in prices Hyperinflation: extraordinary high inflation
Real vs nominal interest Rate The Fisher equation I=r+T r real interest rate i: nominal interest rate 1: inflation rate Nominal interest rate can change because of the change in the real interest rate or/and the inflation rate
Real v.s. Nominal Interest Rate The Fisher equation r: real interest rate i: nominal interest rate : inflation rate Nominal interest rate can change because of the change in the real interest rate or/and the inflation rate i r = +
Nominal Interest rate The quantity theory the Fisher equation An increase in the rate of money growth of 1% causes a 1% increase in the rate of inflation then a 1% increase in the rate of inflation in turn causes a 1% increase in the nominal interest rate This one-for-one relation between the inflation rate and the nominal interest rate is called the Fisher effect (one-for-one refers to % not its value)
Nominal Interest Rate The quantity theory + the Fisher equation An increase in the rate of money growth of 1% causes a 1% increase in the rate of inflation; then a 1% increase in the rate of inflation in turn causes a 1% increase in the nominal interest rate This one-for-one relation between the inflation rate and the nominal interest rate is called the Fisher effect. (one-for-one refers to %, not its value)
Ex Ante vs. ex post 1=P+Z If there is a rumor that the oil price will go up further due to possible opec limitation of production, what will happen?
Ex Ante v.s. Ex Post e i r = + If there is a rumor that the oil price will go up further due to possible OPEC limitation of production, what will happen?