INTERMEDIATE MACRO-ECONOMICS
CHAPTER 4 (MANKIW)
INFLATION RATES AND INTEREST RATES: THE FISHER EQUATION
NOTES by: Chadia Mathurin

Economists differentiate between real and nominal interest rates where: real interest: is defined as the increase or decrease in a consumer’s purchasing power experienced as a result of changes in the interest rate. nominal interest: is defined as the interest payed by the bank.

Let:
i denote the nominal interest rate
r the real interest rate
pi , the inflation rate

The equation for the real interest rate is r = i - pi

Tutorial Sheet 2: Question 3

Assume in Jamaica, the velocity of money is constant. Real GDP grows by 5 percent per year, the money stock grows by 14 percent per year, and the nominal interest rate is 11 percent. What is the real interest rate?

Using the Quantity Equation in its percentage form, we get: %∆M + %∆V = %∆P + %∆Y, where %∆P is equal to the inflation rate. In this equation it is assumed that velocity is constant, thus %∆V = 0. Therefore let: %∆M = 14

%∆V = 0
%∆P = pi
%∆Y = 5

Solving for P, we find that %∆P = %∆M + %∆V - %∆Y. Thus, %∆P = 14 - 0 - 5. %∆P = 9%

Using the Fisher Equation we find that: r = i - pi, where r denotes the real interest rate, i denotes the nominal interest rate and pi denotes the inflation rate. In the above mentioned question i = 11% and using the quantity equation it was found that pi = 9%. Thus the real interest rate is equal to 2%

THE FISHER EQUATION AND FISHER EFFECT

When the equation for finding real interest rates is rearranged, making nominal interest the subject of the formula, the Fisher equation is derived. The fisher equation is therefore as: i = pi + r

The Fisher Equation states that the nominal interest can be affected by either changes in the real interest rate or changes in the price level (inflation). The Fisher Effect shows a one-on- one relationship between the inflation rate and the nominal interest rate. According to the...

...The InterestRate
Essentially, interest is nothing more than the cost someone pays for the use of someone else's money.
The interestrate that applies to investors is the Federal Reserve's federal funds rate. This is the cost that banks are charged for borrowing money from Federal Reserve banks. Why is this number so important? It is the way the Federal Reserve (the "Fed") attempts to control...

... 7
INTRODUCTION
The impact of the change interestrates and inflation has a persistent impact on the well being of any given society. For this purpose it is the understanding that each individual in society should have an understanding of what such changes bring fourth for the man on the street. In this introduction, we are going to introduce certain key points to remember when dealing with interestrate- and...

...InterestRates, Income Distribution, and Monetary Policy Dominance: Post Keynesians and the "Fair Rate" of Interest Author(s): Louis-Philippe Rochon and Mark Setterfield Source: Journal of Post Keynesian Economics, Vol. 30, No. 1 (Fall, 2007), pp. 13-42 Published by: M.E. Sharpe, Inc. Stable URL: http://www.jstor.org/stable/27746784 . Accessed: 28/08/2013 13:51
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...Circular No. 20141 | |
Februarv 04. 2014
All Head of Conventional Branches
All Head of SME Branches
Prime Bank Limited
Bangladesh
Sub:
Reviscd Rates on DeDosit for Convcntional Branches (other than Islamic Bankinq Branches)
Please refer to our previous Instruction Circular no. 0612014 dated January 20, 2014. The rate of interest on
Deposit for Conventional Branches (other than lslamic Banking Branches) and SME Branches has been...

...AGARWAL (Roll- 25)
* TISTA BISWAS (Roll- 26)
(MHROM 1st semester, Calcutta University)
CHART SHOWING DATA OF NOMINAL & REAL GDP, GROWTH RATE, INFLATION & DEFLATION RATE AND EMPLOYMENT (PUBLIC & PRIVATE SECTOR) IN INDIA SINCE 1980 TO 2010
Year | NominalGDP(Rs.) | NominalGDP Growth Rate(%) | RealGDP(Rs.) | RealGDP Growth Rate(%) | Deflator | InflationRate(%) | Public Sector(million) |...

...What is inflationrate?
Inflation means a sustained increase in the aggregate or general price level in an economy. Inflation means there is an increase in the cost of living.
What are the economic policies that lead to low inflation in an economy?
1. Monetary Policy
In the UK and US, monetary policy is the most important tool for maintaining low inflation. In the UK, monetary policy is set by the MPC of...

...Impact of interestrate on Market
Interestrate is one of the most prominent macroeconomic factors among many other macroeconomic factors. It has direct impact not only on our market but also on other macro economic factors like inflation, money supply and investment. Government uses this powerful tool to control money supply, inflation, recession, employment and also investment pattern. Over all, we can say...

...effects of low interestrates on consumption and investment
Dec 1st 2012 | from The Economist print edition WHEN interestrates hit double digits in the late 1970s, house-builders sent planks of wood to the Federal Reserve in protest. With rates stuck near zero, the protests now come from the opposite direction. The retired complain of a “war on savings”. The Fed cut rates to current levels at the end of 2008...